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 Most Likely Worst Case PV of Plant Cost (25yrs) 15 12

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 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) +.6(5) +.2(-3) $4.0mm

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 Denver.35Best.50 Likely.15 Worst Expected Pay-off.35(10) +.5(5) +.15(-6) $5.1mm.35(8) +.5(5) +.15(-3) $4.85mm

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 Denver.45Best.50 Likely.05 Worst Expected Pay-off.35(10) +.5(5) +.15(-6) $5.1mm.45(8) +.5(5) +.05(-3) $5.95mm

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

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

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