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Question: Rob Johnson is a product manager for Diamond Chemical. The firm is considering whether to launch a new product line that will require building a new facility. The technology required to produce the new product is yet untested. If Rob decides to build the new facility and the process is successful, Diamond Chemical will realize a profit of $675,000. If the process does not succeed, the company will lose $825,000. Rob estimates that there is a 0.6 probability that the process will succeed.

Rob can also decide to build a pilot plant for $60,000 to test the new process before deciding to build the full-scale facility. If the pilot plant succeeds, Rob feels the chance of the full-scale facility succeeding is 85%. If the pilot plant fails, Rob feels the chance of the full-scale facility succeeding is only 20%. The probability that the pilot plant will succeed is estimated at 0.6. Structure this problem with a decision tree and advise Rob what to do.

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Statistics and Probability, Statistics

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