A Chemical Company Is Trying to Decide Whether to Build

question 86

Essay

A chemical company is trying to decide whether to build a pilot plant now for a new chemical process or to build the full plant now. If they build a pilot plant now, they could expand it later to a full plant or license the plant to another company. It would cost them $2 million to build the pilot plant and another $2 million later to expand it. If they build the full plant now it would cost $3.5 million to construct.
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The returns they expect to get from the full production plant depend upon the market. They estimate there is a 60% chance the market will be robust, a 30% chance it will remain stable, and a 10% chance it will become stagnate. The returns are estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnate.
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Before they expand the pilot plant, they plan to conduct a comprehensive study. Based on past experience, they expect the study to report a 60% chance of favorable outcome for expansion and a 40% unfavorable chance. In either case they will have to decide whether to expand to a full plant or license the pilot plant. If the report is favorable and they license it, they expect to get $3 million. However, if the report is unfavorable and they license it, they will only get $1 million.
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Develop a decision tree for this problem and determine the optimal decision strategy.

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Definitions:

View

In software, a mode or setting that allows the user to see content in a specific layout or perspective, often customizable based on user preference.

Green Computing

Practices and technologies aimed at designing, manufacturing, using, and disposing of computers, servers, and associated subsystems with minimal impact on the environment.

Environmental Waste

Waste materials produced by human activity that pose a threat to the environment due to their toxic properties, volume, or other hazards.

Redundancy

Duplication of critical components or functions of a system with the intention of increasing reliability of the system.