Building A Decision Tree Assignment

Building A Decision Tree Assignment

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A food company is currently analyzing the warehouse’s storage capacity for finished products. Since demand is growing, this company feels that a good strategy would be to expand the capacity of the current warehouse or build a new one. If a new warehouse is built, its initial cost is estimated at $ 10 million.

If the warehouse is expanded, the initial investment required is estimated at $ 4 million. If the decision to expand is postponed, the company can wait 2 years and then decide whether the warehouse is expanded or left as is.

The demand for the products sold by this company can be high (H1 H2} for the five years used as the planning horizon, it can be high in the first two years and low in the remaining three (H1 L2), it can be low in the first two years and high in the remaining three (L1 H2) and may be low during the five years (L1 L2).

Depending on these levels of demand, the annual net income (millions) of the next five years for Each of the courses of action that can be followed at this time would be:

build a new warehouse for (H1 H2) 4,000,000.

For (H1 L2) 3,800,000. For (L1 H2) 3,600.00. For (L1 L2) 3,000,000
Expand the warehouse (H1 H2) 2,000,000.

For (H1 L2) 1,600,000. For (L1 H2) 1,200,000. For (L1 L2) 1,000,000

If the decision to expand the current warehouse is postponed for 2 years, the investment required for this expansion is estimated at $ 6 million. For this alternative, it is assumed that if the demand is high (low) in the first 2 years, then the annual net income would be $ 1 million ($ 0.6 million). The annual net income (millions of pesos) for the next three years would be:

Expand the warehouse (H2) 3,500,000. (L2) 2,800,000
Do not expand the warehouse (H2) 800,000. (L2) 600,000

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