QUESTION 11 Waldo Books decided to open a new branch. The opportunity of opening

Question

QUESTION 11 Waldo Books decided to open a new branch. The opportunity of opening the new branch depends on the size of the available space and the market. Waldo Books has worked with the consulting company and has projected the following possible annual earnings associated with expanding a large, small space or do nothing when the market is good, fair and weak. Consulting company believes that economic prediction has assigned the probability that the economy will be good and the week at 0.55,0.45, respectively. Waldo can get help from a marketing company to help him make decisions. The firm runs a survey and there is 60% that the result of the survey by positive. The marketing firm is going to charge Waldo $20,000 for the service. a.How much is the actual value of doing a survey? b. What is the best decision for Waldo using the following decision tree? | PAYOFFS Alternatives Large Plant Small Plant No Plant Probabilities | Good Market | $95,000 $45,000 |Weak Market $21,000 $7,000 .55 .45

Explanation / Answer

a)

Considering the survey, we would get the following results: -

b)

Hence, the best decision to choose would be the large plant as it has more EMV

Survey: Positive Results Alternatives Good Market Weak Market Large Plant 67450 6090 Small Plant 31950 2030 No Plant 0 0 Survey: Negative Results Alternatives Good Market Weak Market Large Plant 35150 13230 Small Plant 16650 4410 No Plant 0 0

b)

Alternatives Good Market Weak Market EMV Large Plant 52250 9450 61700 Small Plant 24750 3150 27900 No Plant 0 0

Hence, the best decision to choose would be the large plant as it has more EMV

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