Reference no: EM133076367

Question - Solve the given problem. A businessman must decide whether to open a new mini grocery branch or simply extend the number of hours of its operation on its existing branch with a payoff of P150,000. According to his friend, demand at the new location can either be low or high, which the probabilities are estimated to be 35% and 65%, respectively. If a new branch is opened and demand proves to be high, the businessman may choose to operate 24 hrs. (payoff is P350,000) or to operate 12 hrs. (payoff is P200,000). If a new branch is opened and demand proves to be low, there is no need to operate on a 24-hr basis but instead, they will just stick to 12-hr operation with a payoff of P100,000 or enhance marketing strategy through advertising. Projected response to advertising may either be favorable or not favorable, with estimated probabilities of 40% and 60%, respectively. If demand is favorable, the payoff grows to P310,000 and if the response is unfavorable, the payoff is P120,000. The cost of advertising is P45,000.

a. Draw a decision tree.

b. Determine the expected value for each decision and event nodes.

c. Which alternative is the best for the businessman?