A Pacific Northwest Lumber Company Is Considering the Expansion of One

question 7

Essay

A Pacific Northwest lumber company is considering the expansion of one of its mills.The question is whether to do it now,or wait for one year and re-consider.If they expand now,the major factors of importance are the state of the economy and the level of interest rates.The combination of these two factors results in five possible situations.If they do not expand now,only the state of the economy is important and three conditions characterize the possibilities.The following table summarizes the situation: $\begin{array}{l}\begin{array}{llcc}&&Probabilities &Revenues\\\underline{\text { Expand }}\\&\text { very favorable } & .2 & \$ 80,000 \\&\text { favorable } & .2 & \$ 60,000 \\&\text { neutral } & .1 & \$ 20,000 \\&\text { unfavorable } & .3 & -\$ 20,000 \\& \text { very unfavorable } & .2 & -\$ 30,000 \\\underline{\text { Don't expand }} & & \\ &\text { expansion } & .2 & \$ 50,000 \\&\text { steady } & .5 & \$ 30,000 \\&\text { contraction } & .3 & \$ 10,000\end{array}\end{array}$
a. Draw the decision tree for this problem.
b. What is the expected value for expanding?
c. What is the expected value for not expanding?
d. Based on expected value, what should the company's decision(s) be?

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Definitions:

Malthus's Theory

A theory proposed by Thomas Malthus suggesting that population growth is potentially exponential while the growth of the food supply or other resources is linear, leading to overpopulation and societal strain.

Eat

The act of consuming food for nutritional sustenance.

Social Determinants

Factors in society such as economic status, education, and environment that influence individual and group health.

Industrialization

The process of transforming economies from based on agriculture to one based on the manufacturing of goods, characterized by technological innovation and urbanization.