Question: The Widget-san Company is considering opening a new location. Management is trying to decide whether to build a small, medium, or large facility. The level of demand for the new facility can be described as poor, moderate, or good, with the probability for poor of 0.30, for moderate of 0.55, and for good of 0.15.

If a large facility is built and demand is good, the net present worth of the after-tax earnings is calculated to be $175,000. If demand is moderate for the large facility, the PW will be $100,000; and if demand is poor, the facility will lose a PW of $50,000.

A medium-sized facility will lose a PW of $20,000 if demand is poor and will make a PW of $110,000 if demand is moderate. If demand is good, the medium-sized facility is expected to earn a PW of $120,000, or it can be enlarged at a cost of $50,000 to earn a PW of $165,000 before the cost of the expansion is deducted.

A small facility is estimated to earn a PW of $25,000 if demand is poor. If demand is moderate, the small facility is expected to earn a PW of $90,000, or it can be enlarged moderately at a cost of $40,000 to earn a PW of $110,000 before the cost of the enlargement is deducted. If demand is good, the small facility will earn a PW of $90,000, or it can be enlarged moderately at a cost of $40,000 to earn $110,000 (as above), or greatly enlarged at a cost of $60,000 to earn a PW of $175,000 before the cost of the expansion is deducted.

a. Construct a decision tree manually or have TreePlan draw and solve (for EMV) the decision tree for this problem. Clearly show all the relevant monetary values on the tree.

b. State in words what the company should do to achieve the highest EMV.