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#### The board of directors (BOD) is considering whether or not to construct a processing plant in Darwin, Northern Territory

###### Accounting

The board of directors (BOD) is considering whether or not to construct a processing plant in Darwin, Northern Territory. Pork Bellies will have an arrangement with the council to use the port for 5 years at a rate of 50% on normal cost and after that the cost will increase 175%. If demand is favourable, Pork Bellies will realise a net profit of \$2,000,000 after the 5 years. If the market is not favourable, then they could lose \$800,000. At this stage there is no reliable data on how successful the project could be. The board of directors are working on a 50-50 chance that the processing plant will be successful. 1. Construct a decision tree to analyse the problem. What should the BOD do, justify your answer? (5 marks) 2. The BOD are not confident with a 50-50 approach and have decided to employ a research firm who specialise in Bayesian Theorem to conduct a study on the viability of constructing a processing plant. The study will cost \$10,000 and will work on the following statements of probability: Probability of a favourable market given a favourable study = 0.72 Probability of an unfavourable market given a favourable study = 0.28 Probability of a favourable market given an unfavourable study = 0.21 Probability of unfavourable market given an unfavourable study = 0.79 Probability of a favourable research study = 0.55 Probability of an unfavourable research study = 0.45 a. Develop a decision tree to reflect the new alternatives. (2 marks) b. Using the EMV approach, recommend a strategy that BOD should take. In your response discuss the alternatives. (4 marks) c. Using the expected value of sample information, how much would the BOD be prepared to pay for the study? (4 marks) d. What other information would the BOD want to help in making their decision? (5 marks)