Source: Operations Management by Jay Heizer and Barry Render

10th Edition

Prentice Hall

ISBN: 9780136120902

Ronald Lau, chief engineer at South Dakota Electronics, has to decide whether to build a new

state-of-the-art processing facility.  If the new facility works, the company could realize a

profit of $200,000.  If it fails, South Dakota Electronics could lose $180,000.  At this time,

Lau estimates a 60% chance that the new process will fail.

The other option is to build a pilot plant and then decide whether to build a complete facility.

The pilot plant would cost $10,000 to build.  Lau estimate a 50-50 chance that the pilot plant

will work.  If the pilot plant works, there is a 90% probability that the complete plant, if it is

built, will also work.  If the pilot plant does not work, there is only a 20% chance that the

complete project (if it is constructed) will work.

Lau faces a dilemma.  Should he build the plant?  Should he build the pilot project and then

make a decision?  Construct a decision tree and use expected monetary value to help him

with the decisions he faces.