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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) Low demand - $10M High demand - $14M Probability of high demand is 0.40

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Problem 5 p 137
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)

      • Low demand - $10M

      • 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

High demand (0.40)

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


Expected values
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


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