Cogswell Cogs, is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7.2 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $8 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million. In either case, the probability of demand being high is .45, and the probability of it being low is .55. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Cogswell Cogs make the best decision. a) Complete the decision tree b) Which decision should Cogswell Cogs make? c) Why?
Cogswell Cogs, is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $7.2 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $8 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million. In either case, the probability of demand being high is .45, and the probability of it being low is .55. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Cogswell Cogs make the best decision. a) Complete the decision tree b) Which decision should Cogswell Cogs make? c) Why?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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| Cogswell Cogs, is considering the possibility of building an additional factory that would produce a new addition to its product line. The company is currently considering two options. |
| The first is a small facility that it could build at a cost of $7.2 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) |
| with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $8 million. |
| Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million. |
| In either case, the probability of demand being high is .45, and the probability of it being low is .55. Not constructing a new factory would result in no additional revenue being generated because the current |
| factories cannot produce these new products. Construct a decision tree to help Cogswell Cogs make the best decision. |
| a) Complete the decision tree |
| b) Which decision should Cogswell Cogs make? |
| c) Why? |
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