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Decision Analysis for Facility Expansion in Product Line Diversification

Explore the net present value outcomes of building small vs. large facility for product line expansion given demand scenarios. Analyze with tree diagram to assess probabilities and optimize decision-making process effectively.

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Decision Analysis for Facility Expansion in Product Line Diversification

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  1. COB 300C - The Operations Dimension Capacity Homework Text Problems 13-14

  2. Handout Problem # 13

  3. Handout Problem # 14 A firm that plans to expand its product line must decide whether to build a small or a large facility to produce the new products. If it builds a small facility and demand is low, the net present value after deducting for building costs will be $400,000. If demand is high, the firm can either maintain the small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value of $50,000. If a large facility is built and demand is high, the estimated net present value is $800,000. If demand turns out to be low, the net present value will be negative $10, 000. The probability that demand will be high is estimated to be .60, and the probability of low demand is estimated to be .40. Analyze using a tree diagram.

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