Sunshine Manufacturing Company has developed a unique new product and must now decide between two facility plans. The first alternative is to build a large new facility immediately. The second alternative is to build a small plant initially and to consider expanding it to a larger facility three years later if the market has proven favorable.
Marketing has provided the following probability estimates for a 10-year plan:
If the small plant is expanded, the probability of demands over the remaining seven years is 7/8 for favorable and 1/8 for unfavorable. The accounting department has provided the payoff for each outcome.
Use these estimates to analyze Sunshine's facility decision.
a. Perform a complete decision tree analysis.
b. Recommend a strategy to Sunshine.
c. Determine what payoffs will result from your recommendation.
a. 
b. Recommended strategy: Build the large plant.
c. Possible payoffs that will result: $5,000,000; $2,500,000; or $1,000,000
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Indicate whether the statement is true or false