The figure given below represents the decision tree of an operations head of a facility who considers a new production technique.ER represents his expected return (in thousand $)from the new technique.If he does not adopt the technique his expected return would be zero.The probabilities of the technique being a success or a failure are 0.7 and 0.3 respectively.Compute the expected return (in thousand $)from the adoption of the new production technique.
A)$10,000
B)$1,000
C)-$2,000
D)$7,200
E)$8,600

Question

The figure given below represents the decision tree of an operations head of a facility who considers a new production technique.ER represents his expected return (in thousand $)from the new technique.If he does not adopt the technique his expected return would be zero.The probabilities of the technique being a success or a failure are 0.7 and 0.3 respectively.Compute the expected return (in thousand $)from the adoption of the new production technique. 
A)$10,000 
B)$1,000 
C)-$2,000 
D)$7,200 
E)$8,600

Quizplus · Accepted Answer

To compute the expected return from the adoption of the new production technique, we need to take the weighted average of the return in case of success and failure with their respective probabilities. Thus,
Expected return = (0.7 x $12,000) + (0.3 x $0) = $8,400
Therefore, the best choice is to adopt the new production technique as it will yield an expected return of $8,400, which is higher than the expected return of $0 in case of not adopting it. Option D is the correct answer as it is closest to the computed expected return.

The Figure Given Below Represents the Decision Tree of an Operations