decision theory, Operation Management, History

Write question herA firm must decide whether to construct a small, medium, or large stamping plant. A consultant’s report indicates a .20 probability that demand will be low and an .80 probability that demand will be high.

If the firm builds a small facility and demand turns out to be low, the net present value will be $41 million. If demand turns out to be high, the firm can either subcontract and realize the net present value of $41 million or expand greatly for a net present value of $46 million.

The firm could build a medium-size facility as a hedge: If demand turns out to be low, its net present value is estimated at $17 million; if demand turns out to be high, the firm could do nothing and realize a net present value of $46 million, or it could expand and realize a net present value of $58 million.

If the firm builds a large facility and demand is low, the net present value will be -$16 million, whereas high demand will result in a net present value of $76 million.

b. What is the maximin alternative? (Enter your answers in millions rounded to nearest whole number. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Build a large facility $ million.
Build a small facility $ million.

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c. Compute the EVPI. (Enter your answers in millions of dollars rounded to 2 decimal places. Omit the "$" sign in your response.)

EVPI $ million.

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d. Perform sensitivity analysis on P (high). (Round "x" answer to 2 decimal places. Negative amount should be indicated by a minus sign.)

I Small + x
II Medium + x
III Large + x

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e

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