1. Confronting Action Decisions Decision Problem: Phoenix or Denver? - Where to site the plant? PV of Gross Profit Streams (Dollars millions) Scenario Probability Phoenix Denver Best Case.20 25 20 Most Likely.60 20 17 Worst Case.20 9 9 PV of Plant Cost (25yrs) 15 12

2. Confronting Action Decisions Decision Problem:Phoenix or Denver? - Where to site the plant? Decision Node Do Not Expand 0 Phoenix Event Node.2 Best.6 Likely.2 Worst 10 5 -6 PV of Net Profit* *Gross profit minus Plant Cost Expected Pay-off.2(10) +.6(5) +.2(-6) $3.8mm Denver.2 Best.6 Likely.2 Worst 8 5 -3.2(8) +.6(5) +.2(-3) $4.0mm

3. Confronting Action Decisions Decision Problem:Outcome sensitive to probability distribution? Decision Node Do Not Expand 0 PV of Net Profit* *Gross profit minus Plant Cost Phoenix Event Node.35 Best.50 Likely.15 Worst 10 5 -6 Denver.35Best.50 Likely.15 Worst 8 5 -3 Expected Pay-off.35(10) +.5(5) +.15(-6) $5.1mm.35(8) +.5(5) +.15(-3) $4.85mm

4. Confronting Action Decisions Decision Problem:Probability distributions differ by location? Decision Node Do Not Expand 0 PV - Net Profit* *Gross profit minus Plant Cost Phoenix Event Node.35 Best.50 Likely.15 Worst 10 5 -6 Denver.45Best.50 Likely.05 Worst 8 5 -3 Expected Pay-off.35(10) +.5(5) +.15(-6) $5.1mm.45(8) +.5(5) +.05(-3) $5.95mm

5. Hong Pou$ry Entry Case Enter No Enter $0 Price = $.85/lb Price = $.49/lb p =.5 (1-p) =.5 Stay Exit -$17,000 -$10,000 Net Profit E(Lo) =.5(-10,000) = -$5,000 Expected Net Profit Stay Exit $54,200 $8,000 E(Hi) =.5(54,200) = $27,100 Expected Consequence of Entry = $22,100 = E(Hi) + E(Lo) Hong Poultry Entry Case

6. Critical Decision Values PROBABILITY How low can success probability go? Expected Value of Entry =Expected Value of Exit P*[54,000]=(1-P*)[-10,000]==> P* =.226 P - P* - Margin of error EXIT COST -- A possible barrier to entry? P*[54,000]=(1-P*)[-15,000]==> P* =.383

7. Expected Monetary Value Decision-Making Expected Monetary Value Decision-Making Competition? YES NO Market Don’t Market High Medium Low (.4) (.5) (.1) Competitor Price High Medium Low (.15) (.5) (.35) High Medium Low (.1) (.2) (.7) (.8) (.2) 3.5 Firm’s Price High Medium Low Payoff ($000) $15 -$5 -$20 $30 $10 -$20 $65.0 $15 $5 -$5 $1.5 $2.5 -$1.0 $2.5 $15