Complete the following problems. You may use software, such as Microsoft Visio, to create the decision tree diagram which you then copy and paste into Microsoft Word, or you may simply draw your homework (very neatly please!) on paper and then scan the drawings into Microsoft Word, or take clear, well-lit photos of the drawings and drop those photos into a Microsoft Word file. Please turn in only one Word file containing your entire homework submission.
- Your company is preparing to meet increased demand over the next three years. To do so, its CFO has determined that you should build a new manufacturing facility, either in Bay Town or in Pasadena. The lender will offer different rates for these two plans; for the Bay Town facility it offers a rate of 14% and for Pasadena 18%. The costs to build the factories are identical, but different tax and labor circumstances mean that the profit per unit in Pasadena will be $1.11 whereas in Bay Town it will be 1.06. Assuming that the current demand for your product is 1.5 million units, and that the demand will increase by 5% each future period, conduct a Net Present Value decision-making exercise and make a recommendation on which facility to build.
- Using the previous example (problem #1), conduct a decision tree analysis of this problem assuming that there is instead a 65% chance of demand increasing by 20% and a 35% chance of demand decreasing by 30% (instead of the steady 5% increase seen in problem #1).
- DrawÂ bothÂ decision trees and show the process of making this decision.
- Which offer should you accept, if any?
|Due By (Pacific Time)
||10/16/2015 04:00 pm