Problem #5 , p 137• Expando, Inc. is considering the possibility of

building an additional factory– Small facility ($6M cost)

• Low demand - $10M• High demand - $12M

– Large facility ($9M cost)• Low demand - $10M• High demand - $14M

– Probability of high demand is 0.40 – Probability of low demand is 0.60– No construction no additional revenue

Expando, Inc.

Build small factoryHigh demand (0.40)

Low demand (0.60)

Build small_high demand = $6M

Build small_low demand = $4M

Build large factory

High demand (0.40)

Low demand (0.60)

Build large_high demand = $5M

Build large_low demand = $1M

$ 4.8M

$ 2.6M

ALTERNATIVE REVENUE COST VALUE

Build small factory, high demand $ 12 M $ 6 M $ 6 M

Build small factory, low demand $ 10 M $ 6 M $4 M

Build large factory, high demand $ 14 M $ 9 M $5 M

Build large factory, low demand $ 10 M $ 9 M $ 1 M

Expected Values

• Computing for Expected Values associated w/current decision alternatives– Sample computation: Build small factoryValue of high demand alternative ($6M) x High demand probability (0.4)

+ Value of low demand alternative ($4M) x Low demand probability (0.6)= $ 4.8 M