1. 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)
High demand - $14M
Probability of high demand is 0.40
Probability of low demand is 0.60
No construction  no additional revenue

2. Build small_high demand = $6M
Build small factory
$ 4.8M
Low demand (0.60)
Build small_low demand = $4M
Expando, Inc.
High demand (0.40)
Build large_high demand = $5M
Build large factory
$ 2.6M
Low demand (0.60)
Build large_low demand = $1M
ALTERNATIVE
REVENUE
COST
VALUE
Build small factory, high demand
$ 12 M
$ 6 M
Build small factory, low demand
$ 10 M
$4 M
Build large factory, high demand
$ 14 M
$ 9 M
$5 M
Build large factory, low demand
$ 1 M
Squares – decision points
Circles – chance events
First compute for the value, revenue given, cost also given, subtract = value

3. 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
How to compute for expected values:
Multiply value of alternative with probability, get the sum of the 2 alternatives