DECISION TREE TO EVALUATE CAPACITY ALTERNATIVES CASE The owner of Hackers Computer is considering what to do with his business

over the next five years. Sales growth over the past couple of years has been good, but sales could grow substantially if a major electronics firm is built in his area as proposed. Hackers owner sees three options. The first is to enlarge his current store, the second is to locate at a new site, and the third is to simply wait and do nothing. The decision to expand or move would take little time, and therefore, the store would not lose revenue. If nothing were done the first year and strong growth occurred, then the decision to expand would be reconsidered. Waiting longer than one year would allow competition to move in and would make expansion no longer feasible. The assumptions and conditions are as follows: 1. Strong growth as a result of the increased population of computer fanatics from the new electronics firm has a 55% probability. 2. Strong growth with a new site would give annual returns of Rs. 195,000 per year. Weak growth with a new site would mean annual returns of Rs 115,000. 3. Strong growth with an expansion would give an annual return of Rs 190,000 per year. Weak growth with an expansion would mean annual returns of Rs 100,000. 4. At the existing store with no changes, there would be returns of Rs 170,000 per year if there is a strong growth and Rs 105,000 per year if growth is weak. 5. Expansion at the current site would cost Rs 87,000. 6. The move to new site would cost Rs 210,000. 7. If growth is strong and existing site is enlarged during the second year, the cost would still be Rs 87,000. 8. Operating costs for all options are equal.

CASE

Q. A builder has located a piece of property that she would like to buy and eventually build on. The land is currently zoned for four homes per acre, but she is planning to request new zoning. What she builds depends upon approval of zoning requests and your analysis of this problem to advise her. With her input and your help, the decision process has been reduced to the following costs, alternatives and probabilities: Cost of land: Rs. 20 lakhs Probability of rezoning: .60 If the land is rezoned, there will be additional costs for new roads, lighting and so on, of Rs. 10 lakhs If the land is rezoned, the contractor must decide whether to build a shopping center or 1500 apartments that the tentative plan shows would be possible. If she builds a shopping center, there is a 70% chance that she can sell the shopping center to a large department chain for Rs. 40 lakhs over her construction cost, which excludes the land: and there is a 30% chance that she can sell it to an insurance company for Rs. 50 lakhs over her construction cost (also excluding the land). If , instead of the shopping center, she decides to build the 1500 apartments, she places probabilities on the profits as follows: There is a 60% chance that she can sell the apartments to a real estate investment corporation for Rs 3000 each over her construction cost: there is a 40 % chance that she can get only Rs 2000 each over her construction cost. (Both excluding the land cost) If the land is not rezoned, she will comply with the existing zoning restrictions and simply build 600 homes, on which she expects to make Rs 4000 over the construction cost on each one (excluding the cost of land) a. Draw a decision tree of the problem b. Determine the best solution and the expected net profit.