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Decision Analysis for Facility Expansion

A firm is faced with the decision to build a small or large facility based on demand scenarios. Analyze the net present values for different options and probabilities using a tree diagram.

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Decision Analysis for Facility Expansion

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  1. COB 300C - The Operations Dimension Capacity Homework Text Problems 13-14

  2. Handout Problem # 13

  3. Handout Problem # 14 A firm that plans to expand its product line must decide whether to build a small or a large facility to produce the new products. If it builds a small facility and demand is low, the net present value after deducting for building costs will be $400,000. If demand is high, the firm can either maintain the small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value of $50,000. If a large facility is built and demand is high, the estimated net present value is $800,000. If demand turns out to be low, the net present value will be negative $10, 000. The probability that demand will be high is estimated to be .60, and the probability of low demand is estimated to be .40. Analyze using a tree diagram.

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