A manager is trying to decide whether to build a small,medium, or large facility. Demand can be low, average,or high, with the estimated probabilities being 0.25, 0.40,and 0.35, respectively.A small facility is expected to earn an after-tax net pres-ent value of just $18,000 if demand is low. If demand isaverage, the small facility is expected to earn $75,000; it canbe increased to medium size to earn a net present value of$60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn$60,000 or to large size to earn $125,000.A medium-sized facility is expected to lose an estimated$25,000 if demand is low and earn $140,000 if demand isaverage. If demand is high, the medium-sized facility isexpected to earn a net present value of $150,000; it can beexpanded to a large size for a net payoff of $145,000.If a large facility is built and demand is high, earningsare expected to be $220,000. If demand is average for thelarge facility, the present value is expected to be $125,000;if demand is low, the facility is expected to lose $60,000.Which alternative is best, according to each of thefollowing decision criterion?a. Maximinb. Maximaxc. Minimax regret
A manager is trying to decide whether to build a small,
medium, or large facility. Demand can be low, average,
or high, with the estimated probabilities being 0.25, 0.40,
and 0.35, respectively.
A small facility is expected to earn an after-tax net pres-
ent value of just $18,000 if demand is low. If demand is
average, the small facility is expected to earn $75,000; it can
be increased to medium size to earn a
$60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn
$60,000 or to large size to earn $125,000.
A medium-sized facility is expected to lose an estimated
$25,000 if demand is low and earn $140,000 if demand is
average. If demand is high, the medium-sized facility is
expected to earn a net present value of $150,000; it can be
expanded to a large size for a net payoff of $145,000.
If a large facility is built and demand is high, earnings
are expected to be $220,000. If demand is average for the
large facility, the present value is expected to be $125,000;
if demand is low, the facility is expected to lose $60,000.
Which alternative is best, according to each of the
following decision criterion?
a. Maximin
b. Maximax
c. Minimax regret
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