Problem #5 , p 137 Expando, Inc. is considering the possibility of building an additional factory Small facility ($6M cost) Low demand - $10M High demand.

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Presentation transcript:

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

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

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