Decision Trees and

Capacity Decision
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Market unfavorable (.6)
-$10,000

Market favorable (.4)

$40,000

Market unfavorable (.6)

-$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 1
 Decision Trees and
Capacity Decision
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Large Plant Market unfavorable (.6)
-$10,000

EMV = (.4)($100,000) Market favorable (.4)

+ (.6)(-$90,000) $40,000

Market unfavorable (.6)

EMV = -$14,000 -$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 2
 Decision Trees and
Capacity Decision
-$14,000
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000
$18,000
Market favorable (.4)
$60,000
Medium plant
Market unfavorable (.6)
-$10,000
$13,000
Market favorable (.4)
$40,000

Market unfavorable (.6)

-$5,000

$0
© 2008 Prentice Hall, Inc. S7 – 3
 Strategy-Driven
Capacity Investment Decision

 Operations may be responsible

for return-on-investment (ROI)
 Analyzing capacity alternatives
should include capital
investment, variable cost, cash
flows, and net present value

© 2008 Prentice Hall, Inc. S7 – 4