Invenco, Inc, is experiencing a substantial backlog, and the firm's management is considering two courses of action. The first i
s to arrange subcontracting that it could cost $5 million to establish the logistics and quality control mechanism. If demand for new products is low, the company expects to receive $8 million in revenues with the subcontracting approach. On the other hand, if demand is high, it expects $15 million in revenues with the subcontracting approach. The second option is to build a plant at a cost of $8 million. Were demand to be low, the company would expect $10 million in revenues with the plant. If demands are high the company estimates that the discounted revenues would be $20 million. In either case, the probability of demand being high is .60, and the probability of it being low is .40. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Invenco make the best decision. What is the expected net profit for building a plant?
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