Suppose a manufacturing plant is considering three options for expansion. The first one is to expand into a new plant (large), the second to add on third-shift to the daily schedule (medium), and the third to do nothing (small)
There are three possibilities for demand. These are high, medium, and low with each having an equal likelihood of occurring. Suppose that the profits for the expansion plans are as follows (respective to high, medium, low demand). The large expansion profits are $100000, $10000, -$10000, the medium expansion choice $40000, $40000, $5000 and the small expansion choice $15000, $15000, $15000. Calculate the EMV of each choice. Which of the expansion plans should the manager choose?
EMV large expansion is .33(100000 ) + .33(10000 ) + .33(-10000 ) = $33,333.33
EMV medium expansion is .33(40000 ) + .33 (40000 ) + .33(5000 ) = $28,333.33
EMV small expansion is $15,000
The plant manager should choose the large expansion.
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