Confronted with the decision of building processing plant

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Reference no: EM131133652

Getz Minerals Inc. is confronted with the decision of building a processing plant. The options they are considering are build a large plant, build a small pant or do nothing. Getz Minerals has the option of conducting its own marketing research survey before making the plant construction decision. The survey would cost $65,000 to conduct. Getz realizes that although the market survey will not provide perfect information, it may be extremely helpful in determining what size facility to construct. Management from past experiences with conducting these types of surveys has found that 35% of the time they provide favorable results and 65% of the time the results are unfavorable. With favorable survey results management has concluded that there is a 0.78 probability of favourable market condition and a 0.22 probability of unfavorable market conditions. With unfavorable survey results management has concluded that the probability of a favorable market is 0.27 and the probability of an unfavorable market is 0.73. Without the survey they believe that the probabilities of favorable and unfavorable markets are equal. Earning estimates are $200,000 for a large plant with favorable market conditions and -$180,000 with unfavorable market conditions. Small plant earnings are estimated to be $100,000 with favorable market conditions and -$40,000 with unfavorable market conditions. Should Getz Minerals conduct the market survey based upon its expected value? Construct a decision tree using Palisade’s Precision Tree software to support your recommendation.

Reference no: EM131133652

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