Answer Happy

Ronald Lau, chief engineer at South Dakota Electronics, has to decide whether to build a new state-of-the-art processing facility. If the new facility works, the company could realize profit of $240,000. If it fails, South Dakota Electronics could lose $150,000. At this time, Lau estimates a 60% chance that the new process will fail. The other option is to build a pilot plant and then decide whether to build a complete facility. The pilot plant would cost $15,000 to build. Lau estimates a 50-50 chance that the pilot plant will work. If the pilot plant works, there is a 90% probability that the complete plant, if it is built, will also work. If the pilot plant does not work, there is only a 15% chance that the complete project (if it is constructed) will work. Lau faces a dilemma. Should he build the plant? Should he build the pilot project and then make a decision? Help Lau by analyzing this problem. The correct decision tree for Ronald is shown in thousands). Ronald's initial decision should be to the plant. (all payoffs are in FIGURE 1 Try Pilot 86 PW(50%) PF (50%) Decide Now FIGURE 2 6 Try Pilot 186 PW(50%) 86 PF(50%) 86 W = Work, F = Fail PW = Pilot Works, PF = Pilot Fails 6 W(90%) 225 F(10%) Build Do Not Build 107 W(15%) F(85%) Build - 15 Do Not Build Do Not Build - 165 15 225 86W(40%) 240 Build F(60%) - 165 Build - 15 Do Not Build - 15 186 W(90%) Build F(10%) Do Not Build 107 - 150 0 225 - 165 - 15 W(15%) 225 F(85%) - 165 Ar a Q Q
FIGURE 2 Try Pilot 86 186 PW(50%) 86 PF (50%) Decide Now 6 186 Build Do Not Build - 107 - W(90%) F(10%) Build 15 Do Not Build Build W = Work, F = Fail PW = Pilot Works, PF = Pilot Fails W(15%) F(85%) Do Not Build 225 - 165 - 15 225 - 165 - 15 W(40%) 240 F(60%) - 150 0
FIGURE 3 Try Pilot 186 186 PW (50%) 186 PF (50%) Decide Now 6 186 Build Do Not Build - 107 6 W(90%) F(10%) Build - 15 Do Not Build Build W = Work, F = Fail PW = Pilot Works, PF = Pilot Fails W(15%) F(85%) Do Not Build 225 - - 165 - 15 225 - 165 - 15 W(40%) 240 F(60%) - 150 0