The accompanying figure shows the decision tree of an operations manager who is

Question

The accompanying figure shows the decision tree of an operations manager who is considering a new production technique. ER represents his expected return (in thousand $) from the new technique. If he does not adopt the technique his expected return would be zero. The probabilities of the technique being a success or a failure are .7 and .3 respectively. Compute the expected return (in thousand S) from the adoption of the new production technique. S12,000 ER ER S0 0.3 $4.000 o $8,400 o $1,000 O-$2,000 O$7,200 $8,000

Explanation / Answer

Expected return from the adoption of the new production technique = (0.7)(12,000) + (0.3)( -4,000)

= $(8400 - 1200)

= $ 7200.

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