A Regional Fast?food Restaurant Is Considering an Expansion Program A Using Decision Tree Analysis, What Is the Expected Value

question 28

Essay

A regional fast?food restaurant is considering an expansion program. The major factor influencing the success of such a program is the future level of interest rates. It is estimated that there is a 20 per-cent chance that interest rates will increase by 2 percentage points, a 50 percent chance that they will remain the same, and a 30 percent chance that they will decrease by 2 percentage points. The alternatives they are considering and possible payoffs are shown in the following table:
$\begin{array}{lcc}&\text { Rates Up } & \text { Rates } & \text { Rates Dow1 } \\&2 \text { Percent } & \text { Unchanged }&2 \text { Percent } \\\text { Build } 50 \text { new places } & -\$ 200,000 & \$ 50,000&\$150,000 \\\text { Build } 25 \text { new places } & -\$ 115,000 & \$ 26,000 &\$80,000\\\text { Do nothing } & -\$ 70,000 & 0&\$5,000\end{array}$
a. Using decision tree analysis, what is the expected value (EV) for building 50 new restaurants?
b. Using decision tree analysis, what is the expected value (EV) for building 25 new restaurants?
c. What is the action and corresponding expected value EV for this overall decision tree problem?

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