Mrs Vila Expected Profit Maximization

Mrs Vila Expected Profit Maximization

Question 1

Mrs Rozario Vila owns a 3.5 ha orchard of cashew trees intercropped with other fruit trees such as mango, guava, santol and jackfruit. Mrs Villa normally sells her cashew trees produce raw nuts to local traders who visit her village. Recently, she has discovered a new opportunity. The cashew apple, the tree’s ‘fruit’ can be processed into a sweet drink or distilled into liqueur with significant market potential. She has conducted a feasibility study that it will cost her $1m to build a new factory if she “go it alone”. The second option is to partner with the local farmers association to build the new factory which will cost her $600,000. The third option is do nothing.

She has estimated the potential market for the new product under three different scenarios; (a) high, (b) moderate and (c) low, with 0.3, 0.45, and 0.25 probabilities. The expected revenue for each alternative is shown in the table below.

	High	Moderate	Low
Go it alone	$1,650,000	$1,000,000	$450,000
Partnership	$1,000,000	$850,000	$450,000
Do nothing	$0	$0	$0

Question 1.1. Construct a decision tree to identify the course of action that maximizes Mrs Vila expected profit. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities (create the decision tree in excel, copy and paste on Discussion Forum).

Question 1.2. Which course of action should Mrs Vila take? What is the expected profit in that case?