. A firm that plans to expand its product line must decide whether to build a small or a large facility

to produce the new products. If it builds a small facility and demand is low, the net present value

after deducting for building costs will be $400,000. If demand is high, the firm can either maintain

the small facility or expand it. Expansion would have a net present value of $450,000, and maintaining the small facility would have a net present value of $50,000.

If a large facility is built and demand is high, the estimated net present value is $800,000. If

demand turns out to be low, the net present value will be –$10,000.

The probability that demand will be high is estimated to be .60, and the probability of low demand

is estimated to be .40.

a. Analyze using a tree diagram.

b. Compute the EVPI. How could this information be used?

c. Determine the range over which each alternative would be best in terms of the value of P

(demand low).