Question

The owner of Hackers Computer Store is evaluating three options--expand at current site, expand to a new site, do nothing. The decision process includes the following assumptions and conditions. 1. Strong growth has a 55% probability 2. If expand to a new site: cost = $210,00 revenue: strong growth = $305,000; weak growth = $225,000 3. If expand at current site: cost = $87,000 (in either year 1 or 2) revenue: strong growth = $277,000; weak growth = $187,000 4. If do nothing: revenue: strong growth = $170,000; weak growth = $105,000

a. Construct a decision tree
b. Solve the tree
c. What should this firm decide to do based on decision tree evaluation?
d. Provide critical thinking on the decision from decision tree evaluation

Answer 1

The decision tree evaluation determines that the firm should expand to a new site. However, further analysis and consideration of other factors are recommended before making a final decision.

Step-by-step explanation:

a. Construct a decision tree:

1. The decision tree consists of three options: expand at current site, expand to a new site, or do nothing.
2. Draw a square as the starting point and label it 'Evaluate options'.
3. From this square, draw three branches labeled 'Expand at current site', 'Expand to a new site', and 'Do nothing'.
4. From each of these branches, draw two branches representing the two types of growth: strong growth and weak growth.
5. Attach the corresponding costs and revenues to each branch according to the given probabilities and values.
6. Continue branching out and assigning probabilities and values until all possible outcomes are accounted for.

b. Solve the tree:

1. Calculate the expected value for each leaf node by multiplying the probability by the revenue and subtracting the cost.
2. Work backward through the tree, calculating the expected value at each decision node by taking the maximum value of the corresponding leaf nodes.
3. Continue this process until you reach the starting point, where you will have the expected value for each option.

c. Decision based on the evaluation:

• The option with the highest expected value is the recommended decision, as it represents the best outcome considering the given probabilities and values.
• In this case, the decision tree evaluation shows that the firm should expand to a new site as it has the highest expected value compared to the other options.

d. Critical thinking on the decision:

• However, it's important to consider other factors that may influence the decision, such as market conditions, competition, and potential risks.
• It's also advisable to conduct further analysis and research to validate the findings of the decision tree evaluation and ensure a comprehensive understanding of the potential outcomes.