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Mathematics, 30.04.2021 21:40 connienash95

A supermarket operator must decide whether to build a medium size supermarket or a large supermarket at a new location in Jamaica. Demand at the location can be either average or favourable, with estimated probabilities to be 0.35 and 0.65 respectively. If demand is favorable, the store manager may choose to maintain the current size or to expand. The net present value of profits is $623,000 if the firm chooses not to expand. However, if the firm chooses to expand, there is a 75% chance that the net present value of the returns will be 330,000 and 25% chance the estimated net present value of profits will be $610,000. If a medium size supermarket is built and demand is average, there is no reason to expand and the net present value of the profits is $600,000. However, if a large supermarket is built and the demand turns out to be average, the choice is to do nothing with a net present value of $100,000 or to stimulate demand through local advertising. The response to advertising can be either unfavorable with a probability of 0.2 or favorable with a probability of 0.8. If the response to advertising is unfavourable the net present value of the profit is ($20,000). However, if the response to advertising is favourable, then the net present value of the profits is $320,000. Finally, if the large plant is built and the demand happens to be high, the net present value of the profits is $650,000. Draw a decision tree and determine the most appropriate decision for this company.      

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