Expando, Inc., is considering the possibility of building anadditional factory that would produce a new addition to its productline. The company is currently considering two options. The firstis a small facility that it could build at a cost of $6 million. Ifdemand for new products is low, the company expects to receive $10million in discounted revenues (present value of future revenues)with the small facility. On the other hand, if demand is high, itexpects $12 million in discounted revenues using the smallfacility. The second option is to build a large factory at a costof $9 million. Were demand to be low, the company would expect $10million in discounted revenues with the large plant. If demand ishigh, the company estimates that the discounted revenues would be$14 million. In either case, the probability of demand being highis 0.40, and the probability of it being low is 0.60. Notconstructing a new factory would result in no additional revenuebeing generated because the current factories cannot produce thesenew products.
The following decision tree describes the problem to helpExpando make the best decision.
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