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Problem #5 , p 137

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

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Problem #5 , p 137

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  1. 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

  2. Build small_high demand = $6M High demand (0.40) Build small factory $ 4.8M Low demand (0.60) Build small_low demand = $4M Expando, Inc. High demand (0.40) Build large_high demand = $5M Build large factory $ 2.6M Low demand (0.60) Build large_low demand = $1M

  3. Expected Values • Computing for Expected Values associated w/current decision alternatives • Sample computation: Build small factory Value 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

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