A fast-food restaurant chain is considering a store expansion program. The most important factor to consider is next two year’s level of interest rate. It is estimated that there is a 30% chance that it goes up, a 50% chance that it stays same, and a 20% chance that it goes down. The strategies and corresponding expected payoffs (profit) are
Rate goes-up Rate stays same Rate goes-down
(30%) (50%) (20%)
Build 10 new places -$300,000 $50,000 $250,000
Build 5 new places -$150,000 $26,000 $80,000
Do nothing $70,000 0 $25,000
Draw a decision tree. Calculate expected value at every node. What should they do?