A Chemical Company Is Trying to Decide Whether to Build

Essay

A chemical company is trying to decide whether to build a pilot plant now for a new chemical process or to build the full plant now.If it builds a pilot plant now,it could expand later to a full plant or license the plant to another company.It would cost $2 million to build the pilot plant and another $2 million later to expand it.If the company builds the full plant now,it would cost $3.5 million to construct.​
The returns the company expects to get from the full production plant depend on the market.There is a 60% chance the market will be robust,a 30% chance it will remain stable,and a 10% chance it will become stagnate.The returns are estimated to be $5 million if it is robust,$3 million if it is stable,and $1 million if it is stagnate.​
Before the company expands the pilot plant,it plans to conduct a comprehensive study.Based on past experience,it expects the study to report a 60% chance of favorable outcome for expansion and a 40% unfavorable chance.In either case,it will have to decide whether to expand to a full plant or license the pilot plant.If the report is favorable and the company licenses it,the company expects to get $3 million.However,if the report is unfavorable and the company licenses it,the company will only get $1 million.​
Develop a decision tree for this problem and determine the optimal decision strategy.