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Decision Tree Capacity Planning YP2018

The document presents a decision tree to analyze the expected monetary value (EMV) of three capacity investment options - a large plant, medium plant, or doing nothing. It calculates the EMV for the large plant as -$14,000 based on a 40% chance the market is favorable with $100,000 return and 60% it is unfavorable with -$90,000 loss. The medium plant has an EMV of $18,000 and doing nothing has an EMV of $13,000. It concludes analyzing capacity alternatives should include factors like capital investment, costs, cash flows, and net present value.

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Andhika Kautsar
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456 views4 pages

Decision Tree Capacity Planning YP2018

The document presents a decision tree to analyze the expected monetary value (EMV) of three capacity investment options - a large plant, medium plant, or doing nothing. It calculates the EMV for the large plant as -$14,000 based on a 40% chance the market is favorable with $100,000 return and 60% it is unfavorable with -$90,000 loss. The medium plant has an EMV of $18,000 and doing nothing has an EMV of $13,000. It concludes analyzing capacity alternatives should include factors like capital investment, costs, cash flows, and net present value.

Uploaded by

Andhika Kautsar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Decision Trees and

Capacity Decision
Market favorable (.4)
$100,000

Market unfavorable (.6)


-$90,000

Market favorable (.4)


$60,000
Medium plant
Market unfavorable (.6)
-$10,000

Market favorable (.4)


$40,000

Market unfavorable (.6)


-$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 1
Decision Trees and
Capacity Decision
Market favorable (.4)
$100,000

Market unfavorable (.6)


-$90,000

Market favorable (.4)


$60,000
Medium plant
Large Plant Market unfavorable (.6)
-$10,000

EMV = (.4)($100,000) Market favorable (.4)


+ (.6)(-$90,000) $40,000

Market unfavorable (.6)


EMV = -$14,000 -$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 2
Decision Trees and
Capacity Decision
-$14,000
Market favorable (.4)
$100,000

Market unfavorable (.6)


-$90,000
$18,000
Market favorable (.4)
$60,000
Medium plant
Market unfavorable (.6)
-$10,000
$13,000
Market favorable (.4)
$40,000

Market unfavorable (.6)


-$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 3
Strategy-Driven
Capacity Investment Decision

 Operations may be responsible


for return-on-investment (ROI)
 Analyzing capacity alternatives
should include capital
investment, variable cost, cash
flows, and net present value

© 2008 Prentice Hall, Inc. S7 – 4

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