Need to make a decision tree in word based on the following –
Allensmith Company is considering whether to build a large plant or a small plant for new product, which has an estimated life of 7 years. A small plant requires an investment of $3.4 million and a large plant of $4 million. The following estimates are available for annual income.
The probability of high demand in first year is 0.75. If the demand is high in the first year, the probabilities of high and low demands in subsequent years are 0.7 and 0.3 respectively. The probability of low demand in the first year is 0.25. If the demand is low in the first year, the probabilities of high and low demands in subsequent years are 0.2 and 0.8 respectively.
Evaluate the decision alternatives open to the company using decision trees. Which alternative should be followed by the Allensmith Company and what return can be expected?