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Decision Analysis for Expando, Inc. on Factory Expansion Options

Expando, Inc. is evaluating the potential of building an additional factory, considering two options: a small facility costing $6M and a large facility costing $9M. The potential revenue varies based on demand—$12M for high demand and $10M for low demand for the small facility, and $14M for high demand and $10M for low demand for the large facility. The probabilities of high and low demand are 0.40 and 0.60 respectively. This analysis computes the expected values for each construction option to guide the decision-making process.

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Decision Analysis for Expando, Inc. on Factory Expansion Options

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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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