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    Problem #5, P 137: - Expando, Inc. Is Considering The Possibility of Building An Additional Factory

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    Purna Choudhary
    Expando, Inc. is considering building a small ($6M cost) or large ($9M cost) additional factory. There is a 40% chance of high demand yielding $12M or $14M revenue respectively, and a 60% chance of low demand yielding $10M revenue for both. The expected value is highest at $4.8M for building the small factory due to its lower cost and sufficient revenue for both demand levels.

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    Problem #5, P 137: - Expando, Inc. Is Considering The Possibility of Building An Additional Factory

    Uploaded by

    Purna Choudhary
    105 views3 pages
    Expando, Inc. is considering building a small ($6M cost) or large ($9M cost) additional factory. There is a 40% chance of high demand yielding $12M or $14M revenue respectively, and a 60% chance of low demand yielding $10M revenue for both. The expected value is highest at $4.8M for building the small factory due to its lower cost and sufficient revenue for both demand levels.

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    Problem+#5,+Chap+5

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    Expando, Inc. is considering building a small ($6M cost) or large ($9M cost) additional factory. There is a 40% chance of high demand yielding $12M or $14M revenue respectively, and a 60% chance of low demand yielding $10M revenue for both. The expected value is highest at $4.8M for building the small factory due to its lower cost and sufficient revenue for both demand levels.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    105 views3 pages

    Problem #5, P 137: - Expando, Inc. Is Considering The Possibility of Building An Additional Factory

    Uploaded by

    Purna Choudhary
    Expando, Inc. is considering building a small ($6M cost) or large ($9M cost) additional factory. There is a 40% chance of high demand yielding $12M or $14M revenue respectively, and a 60% chance of low demand yielding $10M revenue for both. The expected value is highest at $4.8M for building the small factory due to its lower cost and sufficient revenue for both demand levels.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
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    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

    Build small
    factory

    Expando,
    Inc.
    Build large
    factory

    ALTERNATIVE

    Build
    small_high
    demand =
    $ 4.8M
    $6M
    Low demand
    Build
    (0.60)
    small_low
    demand =
    $4M
    High demand
    Build
    (0.40)
    large_high
    demand =
    $ 2.6M
    $5M
    Low demand
    Build
    (0.60)
    large_low
    demand =
    REVENU COST $1M
    VALUE
    E
    High demand
    (0.40)

    Build small factory, high demand

    $ 12 M

    $6M

    $6M

    Build small factory, low demand

    $ 10 M

    $6M

    $4 M

    Build large factory, high demand

    $ 14 M

    $9M

    $5 M

    Expected Values
    Computing for Expected Values
    associated w/current decision
    alternatives
    Sample computation: Build small factory
    Value 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

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