Problem #5, p 137
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Transcript of Problem #5, p 137
Problem #5 , p 137• Expando, Inc. is considering the possibility of
building an additional factory– Small facility ($6M cost)
• Low demand - $10M• High demand - $12M
– Large facility ($9M cost)• Low demand - $10M• High demand - $14M
– Probability of high demand is 0.40 – Probability of low demand is 0.60– No construction no additional revenue
Expando, Inc.
Build small factoryHigh demand (0.40)
Low demand (0.60)
Build small_high demand = $6M
Build small_low demand = $4M
Build large factory
High demand (0.40)
Low demand (0.60)
Build large_high demand = $5M
Build large_low demand = $1M
$ 4.8M
$ 2.6M
ALTERNATIVE REVENUE COST VALUE
Build small factory, high demand $ 12 M $ 6 M $ 6 M
Build small factory, low demand $ 10 M $ 6 M $4 M
Build large factory, high demand $ 14 M $ 9 M $5 M
Build large factory, low demand $ 10 M $ 9 M $ 1 M
Expected Values
• Computing for Expected Values associated w/current decision alternatives– Sample computation: Build small factoryValue of high demand alternative ($6M) x High demand probability (0.4)
+ Value of low demand alternative ($4M) x Low demand probability (0.6)= $ 4.8 M