Question

1. A building supply store is considering expanding its capacity to meet a growing demand for its products. The alternatives are to build a new store at a site nearby, expand the existing store, or do nothing. There is a 60% chance the economy will be stable, and a 20% chance of either an economic upturn or downturn. The following NPV estimates based on economic conditions have been provided:

	Market upturn (millions)	Stable market (millions)	Market downturn (millions)
Build new store	$1.9	$0.3	-$0.5
Expand old store	$1.5	$0.5	-$0.3
Do nothing	$0.5	$0.0	-$0.1

1. Set up a decision‐tree for this problem
2. What should the company do?
   

Answer 1

Question: A - Decision Dree

B. Question

The Company should take the plan "Expand old store". Since it has changes on 1.5 million market upturn. Onthe otherhand market downword is -0.3 which is lesser than Build a new store (-0.5). It represents that it has less risk. When we compare the stable market expand old store plan has the highest value of 0.5 million.

So the company should expand the old store instead of Building new store or Do nothing.