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PT. Usaha Superior is a car seat manufacturer who has to decide whether to build a large-scale factory or a small-scale factory that is expected to have a safe prospect of 8 years. The amount of working capital needed to build a factory up to operation: a large-scale plant of $3,000,000 and a small-scale plant of $1,500,000. Estimated sales opportunity for 8 years is high demand 0.5; moderate demand 0.3; and low demand 0.2. The payoff analysis for each scenario is as follows:

a. A large-scale factory if demand is high the payoff is $1 million per year for the first 4 years and for the next 4 years the company can increase its payoff by sub-contracting. With sub-contract in the next 4 years and demand remains high the payoff is $1.5 million per year, if demand is moderate and low there will be idle capacity, so the payoff is only $500,000 per year for medium and low demand respectively. $400,000 per year for low demand. No sub-contract a second 4 year payoff of $1 million per year.

b. A large-scale factory with moderate demand, the payoff is $500,000 for the first 3 years, $600,000 for the second 3 years, and $750,000 for the last 2 years.

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c. A large-scale factory with low demand will incur a negative payoff of $250,000 per year.

d. A small-scale factory with a high demand payoff of only $200,000 per year, in this situation selling costs increase due to the inability to supply customers.

e. A small-scale factory with moderate demand, the payoff is $400,000 per year.

f. A small-scale factory with small demand is able to optimize its production capacity, so that it can achieve a payoff of $600,000 for the first 4 years and $750,000 for the next 4 years. Draw a decision tree to help the management of PT. Effort Superior takes the decision. Which decision should be made?

 
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