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:
a.Using decision tree analysis, what is the expected value for expanding?
b.Using decision tree analysis, what is the expected value for not expanding?
c.Based on expected value, what should the company's decision(s) be?
Definitions:
Cash Disbursements
The outflow of cash for expenses, investment purchases and other payments.
Manufacturing Overhead Budget
A financial plan that estimates the expected indirect costs of producing goods or services, excluding direct materials and direct labor.
Direct Labor-Hour
A measure of the amount of time spent by workers who are directly involved in the production process of creating goods or services.
Merchandising Firm
A type of business that purchases finished products and sells them to consumers without altering the form of the goods.
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