Question: A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18000 if demand is low. If demand is average, the small facility is expected to earn $75000; it can be increased to average size to earn a net present value of $60000. If demand is high, the small facility is expected to earn $75000 and can be expanded to average size to earn $60000 or to large size to earn $125000.

A medium-sized facility is expected to lose an estimated $25000 if demand is low and earn $140000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150000; it can be expanded to a large size for a net payoff of $145000.

If a large facility is built and demand is high, earnings are expected to be $220000. If demand is average for the large facility, the present value is expected to be $125000; if demand is low, the facility is expected to lose $60000.

a) Draw a decision tree for this problem

b) What decision should management make to achieve the highest expected payoff?