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Best Answer

Decision
Tree

As can be seen from the decision Tree, the Final decision would
be to build a Large Plant, as the expected payoff from large plant
is $
544,000, whereas from small plant the expected payoff will be
$ 242,000

Calculation of
expected payoff from small plant

If the demand is high , then the manufacturer should expand, as

the NPV in case of expansion would be $ 270,000 viz-a-viz $ 223,000
in case
of non expansion.

So, the expected payoff for small plant is (270,000 * 0.6) +

(200,000 *0.4) = $ 242,000

Calculation of
Expected Payoff from Large Plant

In case of low demand, the Manufacturer should go for local

advertising, as it will be give expected NPV of $ 160,000 viz-a-viz
NPV of $
40,000 in case of no advertising

So, the expected payoff for large plant is (800,000 * 0.6) +

(160,000 * 0.4) = $ 544,000