A supermarket operator must decide whether to build a medium size supermarket or a large supermarket at a new
location in Jamaica. Demand at the location can be either
average or favourable, with estimated probabilities to be 0.35
and 0.65 respectively. If demand is favorable, the store manager
may choose to maintain the current size or to expand. The net
present value of profits is $623,000 if the firm chooses not to
expand. However, if the firm chooses to expand, there is a 75%
chance that the net present value of the returns will be 330,000
and 25% chance the estimated net present value of profits will
be $610,000. If a medium size supermarket is built and demand
is average, there is no reason to expand and the net present value
of the profits is $600,000. However, if a large supermarket is
built and the demand turns out to be average, the choice is to do
nothing with a net present value of $100,000 or to stimulate
demand through local advertising. The response to advertising
can be either unfavorable with a probability of 0.2 or favorable
with a probability of 0.8. If the response to advertising is
unfavourable the net present value of the profit is (S20,000).
However, if the response to advertising is favourable, then the
net present value of the profits is $320,000. Finally, if the large
plant is built and the demand happens to be high, the net present
value of the profits is $650,000. Draw a decision tree and
determine the most appropriate decision for this company.