# present value and decision tree

May 12th, 2015
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A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just \$18,000 if demand is low. I

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Homework OPMA manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just \$18,000 if demand is low. If demand is average, the small facility is expected to earn \$75,000; it can be increased to medium size to earn a net present value of \$60,000. If demand is high, the small facility is ex- pected to earn \$75,000 and can be expanded to medium size to earn \$60,000 or to large size to earn \$125,000. A medium-sized facility is expected to lose an estimated \$25,000 if demand is low and earn \$140,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of \$150,000; it can be expanded to a large size for a net payoff of \$145,000. If

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