Question
In: Operations Management
Question 2 PT 1: A manager is trying to decide whether to build a small, medium,...
Question 2
PT 1: A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, 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 present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded 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 $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000.
If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the large facility, the present value is expected to be $125,000; if demand is low, the facility is expected to lost $60,000.
Which alternative is best, according to each of the following decision criterion?
a) Maximin
b) Maximax
c) Minimax regret
PT 2: Draw a decision tree for the three options described in Part 1. What should management do to achieve the highest expected payoff?
Please show work step-by-step. Thank you.
Solutions
keosha answered 7 months agoRelated Solutions
Question 2 A manager is trying to decide whether to build a small, medium, or large...
Question 2 A manager is trying to decide
whether to build a small, medium, or large facility. Demand can be
low, 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 present
value of just $18,000 if demand is low. If demand is average, the
small facility is expected to earn $75,000; it can be increased to
medium size to earn a net present value of $60,000....
A manager is trying to decide whether to build a small, medium, or large facility. Demand...
A manager is trying to decide whether to build a small, medium,
or large facility. Demand can be low, 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 present
value of just $18,000 if demand is low. If demand is average, the
small facility is expected to earn $75,000; it can be increased to
medium size to earn a net present value of $60,000. If demand...
A manager is trying to decide whether to build a small, medium, or large facility. Demand...
A manager is trying to decide whether to build a small, medium,
or large facility. Demand can be low, 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 present
value of just $18,000 if demand is low. If demand is average, the
small facility is expected to earn $75,000; it can be increased to
medium size to earn a net present value of $60,000. If demand...
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