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Question

\$5.00Spectrum Hair Salon is considering expan

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• Due on Feb. 12, 2012
• Asked on Feb 11, 2012 at 11:19:55PM

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Q:
Spectrum Hair Salon is considering expanding its business, as it is experiencing a large growth. The question is whether it should expand with a bigger facility than needed, hoping that demand will catch up, or with a small facility, knowing that it will need to reconsider expanding in three years. The management at Spectrum has estimated the following chances for demand: the likelihood of demand being high is 0.70; the likelihood of demand being low is 0.30. Estimated profits for each alternative are as follows: large expansion has an estimated profitability of either \$100,000 or \$70,000, depending on whether demand turns out to be high or low; small expansion has a profitability of \$50,000, assuming that demand is low; small expansion with an occurrence of high demand would require considering whether to expand further. If the business expands at this point, the profitability is expected to be \$90,000. If it does not expand further, the profitability is expected to be \$60,000. Draw a decision tree showing the decisions, chance events, and their probabilities, as well as the profitability of outcomes, and solve the decision tree EVsmall expansion = \$, EVlarge expansion = \$ What should Spectrum do? Company should opt for the expansion now.

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• Posted on Feb. 12, 2012 at 01:14:01AM
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Preview: ... ion of the problem.        ...

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Decision Tree Problem.docx (381K) (Preview)

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• Posted on Feb. 12, 2012 at 03:13:37AM
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Preview: ... ed in low demand, expected profit = 50,000 × 0.3 = \$15,000 The largest value in the above three is \$63,000. Therefore, the Expected value for small expansion i ...

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Spectrum Hair solution.doc (31K) (Preview)

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