. Tire and Rubber Products (TRP) is considering expanding production increases in the demand for one of its tire products. TRP’s alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. The market for this particular tire product may expand, remain stable, or contract. TRP’s marketing department estimates the probabilities of these market outcomes as 0.25, 0.35 and 0.40, respectively. Payoff Table is given below:
|
Decision / Market Outcome |
Market Expands |
Market Stable |
Market Contracts |
|
Construct a new plant |
400000 |
-100000 |
-200000 |
|
Expand existing plant |
250000 |
-50000 |
-75000 |
|
Do nothing |
50000 |
0 |
-30000 |
Draw the decision tree and identify the strategy that maximizes the tire manufacturer’s expected profit. Find EVPI (10 marks)
