Question

1. A fast‑food restaurant chain is considering a store expansion program. The most important factor to consider is next 10 years’ economy. It is estimated that there is a 50% chance that it goes up, a 30% chance that it stays same, and a 20% chance that it goes down. The strategies and corresponding expected payoffs (profit) are:

                                               goes-up             same             goes-down   

Build 10 new places        $20M                     $10M                  -$10M

Build 5 new places           $15M                     $8M                    -$2M

Do nothing                         $10M                    $4M                       $0

Draw a decision tree. Calculate expected value at every node. What should they do?

Answer 1

conside the above given that decision Foree diagYan O.S O. 3 O.2 Baild lo Builds -lon 1Sn O«S G.2 -2M Donoing OS O.3 o.2 A EVCA-lo= 0S(2003(o)-o2 (o) 0+3-2 = 11 M BEVLA-S) Ev(A-s) 0(1s)+0-3/9) + o2(-2) - 9.SM Ev[notit) Ev[noting S (19) + 03(4) +02 (9) S+12GM

he conpahy should lo est quah EV oF 11M