A firm that plans to expand its product line must decide whether to build a small or large facility to produce the new product. If it builds a small facility and demand turns out to be low, the net present value after deducting for building costs will be P400, 000.
A firm that plans to expand its product line must decide whether to build a small or large facility to produce the new product. If it builds a small facility and demand turns out to be low, the net present value after deducting for building costs will be P400, 000. If demand turns out to be high, the firm can either maintain the small facility or expand it. Expansion would have a net present value P300, 000, and maintaining the small facility would have a net present value of P50,000. If a large facility is built and demand is high, the estimated net present value is P800, 000. If demand turns out low, the present value will be (P10, 000). The probability that demand will be high is 60% and the probability of low demand is estimated to be 40%. Analyze the problem above using a tree diagram/decision tree.
The post A firm that plans to expand its product line must decide whether to build a small or large facility to produce the new product. If it builds a small facility and demand turns out to be low, the net present value after deducting for building costs will be P400, 000. appeared first on My Blog.