Probability Analysis

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A General Manger of Harley-Davidson has to decide on the size of a new facility. The GM has narrowed the choices to two: large facility or small facility. The company has collected information on the payoffs. It now has to decide which option is the best using probability analysis, the decision tree model, and expected monetary value.

Options:

Facility	Demand Options	Probability	Actions	Expected Payoffs

Large	Low Demand	0.4	Do Nothing	($10)
	Low Demand	0.4	Reduce Prices	$50
	High Demand	0.6		$70

Small	Low Demand	0.4		$40
	High Demand	0.6	Do Nothing	$40
	High Demand	0.6	Overtime	$50
	High Demand	0.6	Expand	$55

Decision Tree

Determination of chance probability and respective payoffs:

Build Small:
Low Demand	0.4($40)=$16
High Demand	0.6($55)=$33

Build Large:
Low Demand	0.4($50)=$20
High Demand	0.6($70)=$42

Determination of Expected Value of each alternative
Build Small: $16+$33=$49
Build Large: $20+$42=$62

Assignment 2 Grading Criteria	Maximum Points
The diagram is accurate and labeled correctly. The diagram clearly illustrates the sequence of events and their probability of occurrences. This section simply requires you to duplicate the decision tree graph shown in the assignment. You need to re-create it NOT copy/paste. Knowing how to create graphs like this is a good skill to have when making presentations to groups.	32
A step-by-step breakdown of the calculations for the chance of probability and respective payoff is clearly communicated. The results of the calculations are accurate. This section requires you to show the steps of calculating probability. The assignment gives you the result of the probability but not the calculations to arrive at the number. Here is a link to the steps in calculating probability.	28
A step-by-step breakdown of the calculations for expected value is clearly communicated. The results of the calculations are accurate. This section requires you to show the steps of calculating expected value. The assignment gives the outcome of the calculations but not the process. Here are steps to calculating expected value.	20
Clear and concise statement explaining the decision and a description of elements that lead to the decision. Given the information you have calculated and read in the assignment, what should HD do? Build big or build small? Why?	20
Total:	100