A company is planning a plant expansion. They can build a large or small plant. The...

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. For the large plant, the company expects $90 million in revenue if demand is high and $40 million if demand is low. For the small plant, the company expects $55 million in revenue if demand is high and $20 million if demand is low. The cost of the large plant is $5 million. The small plant cost is $1 million.

The company believes that there is a 72% chance that demand for their products will be high and a 28% chance that it will be low.

Construct a payoff and regret matrix based on the given information.

What is the decision according to the EMV criterion? Be sure to support your answer.

Is your decision sensitive to the demand assumptions given for this problem? You may answer generally, such as “very sensitive” or “not very sensitive” as long as you support your answer.

The company can pay a market research firm to survey consumer attitudes towards the company's products. The market research firm cost is $100,000. The market research firm has provided the following cross tabulation showing recent results.

	High Demand	Low Demand	Total
Favorable	.66	.10	.76
Unfavorable	.06	.18	.24
Total	.72	.28	1

Construct a decision tree for this problem showing when the survey is conducted but the plant has not been built. Include all relevant probabilities on the tree and all EMVs needed.

What is the expected value of the market research survey data?

Should the market research firm be hired at a cost of $100,000? Be sure to support your answer.

Solutions

Expert Solution

Colby Messinger answered 1 year ago

Next > < Previous

Related Solutions

A tomato plant with large leaves and round fruits was crossed to a plant with small...

A tomato plant with large leaves and round fruits was crossed to a plant with small leaves and oblong fruits. The F1 consisted of plants with large leaves; about half of these plants made round fruits and the other half made oblong fruits. Two F1 plants (one with round fruits and one with oblong fruits) were then analyzed through further crossing. The results were: Cross F1 plant #1 with round fruits × parent with round fruits F1 plant #1 with...

Your Company needs $10,000,000 for a plant expansion. You can obtain the funds by either issuing...

Your Company needs $10,000,000 for a plant expansion. You can obtain the funds by either issuing common stock or issuing bonds. Common stock is currently trading at $100 per share and the effective rate for bonds is 5%. What factors should be considered in making this decision? What decision will you make? Does your response change if stock is trading at $10,000 per share and interest rates are 15%? Your response must be a minimum of 50 words.

You are trying to build the small scale hydroelectric power plant on the hill. Potential energy...

You are trying to build the small scale hydroelectric power plant on the hill. Potential energy is the main energy that you can use to generate the electricity. How much of the water (in kg) should be in the source to provide the 7 kW of power to the house? Assume that the efficiency of the electricity generator is 0.7 and g=9.8 m/s2 .

A small community of 50 members in Bidiya has decided to build a mini biogas plant...

A small community of 50 members in Bidiya has decided to build a mini biogas plant in their area. The waste required for biogas production was collected from different the cows grazing in the farm. Daily consumption of gas per person is a person is 500 liters. Take the specific gravity of the slurry as 1.165 gram/cm 3. For a retention period of sixty-three days design a bio digester. What would be your conclusion regarding the amount of biogas produced...

When a manufacturing company decides to build a plant in a foreign country, the company is...

When a manufacturing company decides to build a plant in a foreign country, the company is often able to get regions of the country to compete for the jobs that will be brought to the area. The governments and municipalities of these regions will often offer subsidies in the form of below-market rate financing. Consider this hypothetical example. You are evaluating a project based in Zimbabwe. Currently Zimbabwe does NOT have their own currency and the USD is used for...

Please show and explain you work. Firm 2 Don’t Expand Small Expansion Large Expansion Firm 1...

Please show and explain you work. Firm 2 Don’t Expand Small Expansion Large Expansion Firm 1 Don’t Expand 18,18 15,20 9,18 Small Expansion 20,15 16,16 8,12 Large Expansion 18,9 12,8 0,0 There are two firms that are considering the effect on their profits of expanding their capacity. Their choices are no expansion, a small capacity expansion, and a large capacity expansion. Expansion of capacity would allow a firm to obtain a larger market share, but it would also put downward...

The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all...

The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $49 per share price of the company's common stock did not reflect its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the...

F.J. Brewerton Retailers, Inc., must decide whether to build a small or a large facility at...

F.J. Brewerton Retailers, Inc., must decide whether to build a small or a large facility at a new location in Omaha. Demand at the location will either be low or high, with probabilities 0.4 and 0.6, respectively. If Brewerton builds a small facility and demand proves to be high, he then has the option of expanding the facility. If a small facility is built and demand proves to be high, and then the reatiler expands the facitliy, the payoff is...

The J. R. Ryland Computer Company is considering a plant expansion that will enable the company...

The J. R. Ryland Computer Company is considering a plant expansion that will enable the company to begin production of a new computer product. The company's president must determine whether to make the expansion a medium- or large-scale project. The demand for the new product involves an uncertainty, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for the demands are 0.20, 0.10, and 0.70, respectively. Letting x and y indicate the annual...

The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin...

The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The company’s president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.70, and 0.10, respectively. Letting x and y indicate the annual profit in thousands of dollars,...

Subjects