Maurice Tutor

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    Argosy University/ Phoniex University/
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    Oct-2001 - Nov-2016

Category > Management Posted 12 Jan 2018 My Price 6.00

medium-size facility

9.  A firm must decide whether to construct a small, medium, or large stamping plant. A consultant’s report indicates a .20 probability that demand will be low and an .80 probability that demand will be high.

If the firm builds a small facility and demand turns out to be low, the net present value will   be

$42 million. If demand turns out to be high, the firm can either subcontract and realize the net pres- ent value of $42 million or expand greatly for a net present value of $48 million.

The firm could build a medium-size facility as a hedge: If demand turns out to be low, its net present value is estimated at $22 million; if demand turns out to be high, the firm could do nothing and realize a net present value of $46 million, or it could expand and realize a net present value of $50 million.

If the firm builds a large facility and demand is low, the net present value will be -$20 million, whereas high demand will result in a net present value of $72 million.

a.    Analyze this problem using a decision tree.

b.    What is the maximin alternative?

c.    Compute the EVPI and interpret it.

d.    Perform sensitivity analysis on P(high).

 

Answers

Maurice Tutor
(5)
Status NEW Posted 12 Jan 2018 08:01 PM My Price 6.00

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