Question 2 A manager is trying to decidewhether to build a small, medium, or large facility. Demand can below, average, or high, with the estimated probabilities being 0.25,0.40, and 0.35, respectively.
A small facility is expected to earn an after-tax net presentvalue of just $18,000 if demand is low. If demand is average, thesmall facility is expected to earn $75,000; it can be increased tomedium size to earn a net present value of $60,000. If demand ishigh, the small facility is expected to earn $75,000 and can beexpanded to medium size to earn $60,000 or to large size to earn$125,000.
A medium-sized facility is expected to lose an estimated $25,000if demand is low and earn $140,000 if demand is average. If demandis high, the medium-sized facility is expected to earn a netpresent value of $150,000; it can be expanded to a large size for anet payoff of $145,000.
If a large facility is built and demand is high, earnings areexpected to be $220,000. If demand is average for the largefacility, the present value is expected to be $125,000; if demandis low, the facility is expected to lost $60,000.
Which alternative is best, according to each of the followingdecision criterion?
a) Maximin
b) Maximax
c) Minimax regret
Question 3 (40 points). Draw a decision treefor the three options described in Question 2. What shouldmanagement do to achieve the highest expected payoff?
