Question

A company currently sells products in the United States and is considering expanding to China or Vietnam. Expanding won't impact the company's sales, revenue or profit in the United States. If the company expands to China there is a 20% chance profit over the next 5 years will be $2,000,000, a 30% chance profit will be $1,000,000 and a 50% chance the company will lose $2,000,000. If the company expands to Vietnam, there is a 70% chance profit over the next 5 years will be $1,000,000 and a 30% chance the company will lose $2,500,000. Using a decision tree, what decision should the company make

Answer 1

Answer: Company should not expand to either.

Explanation:

Find the expected values of expanding to either country and pick the country with the highest expected value:

China:

= ∑(Probability of outcome * Outcome)

= (20% * 2,000,000) + (30% * 1,000,000) + (50% * -2,000,000)

= -$300,000

Vietnam:

= (70% * 1,000,000) + (30% * -2,500,000)

= -$50,000

Both countries result in an expected loss so company should not expand to either of them.