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A fast food restaurant chain is considering a store expansion program. The most important factor...

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A fast food restaurant chain is considering a store expansion program. The most important factor to consider is next two year's level of interest rate. It is estimated that there is a 20% chance that it goes up, a 50% chance that it stays same, and a 30% chance that it goes down. The strategies and corresponding expected payoffs (profit) are:

Rate goes-up Rate stays same Rate goes-down
(30%) (50%) (20%)
Build 10 new places -$200,000 $50,000 $150,000
Build 5 new places -$15,000 $26,000 $80,000
Do nothing -$70,000 0 $5,000

Draw a decision tree and calculate expected value at every node. What is the best strategy to take and corresponding expected value?

Decision Tree

Dilemma in decision making is common in everyday life. With many alternatives available it becomes necessary to fin best option therefore various tools like decision tree are use. These models help in making decisions by displaying possible results, values and others.

Answer and Explanation:

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Here, R1 is calculate by;{eq}\begin{align*} 0.3*200000 + 0.5*50000 + 0.2*150000\\ = 60000 + 25000 + 30000\\ = 115000 \end{align*} {/eq}

R2...

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Analyzing Business Problems Using Decision Trees & Payoff Tables

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Chapter 5 / Lesson 5
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Businesses are faced with decisions every day, but how do you figure out the best course of action for your business? In this lesson, we'll explore two tools to help you out: decision trees and payoff tables.


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