Process A and Process B are two manufacturing processes being considered, with each having a 60% chance of high sales and 40% chance of low sales. Process A has an expected NPV of $61M compared to $58.20M for Process B. Process B would only have a higher expected NPV than Process A if it had a low compound cost and high sales. Otherwise, Process A has the greater expected NPV and is the best option.

1. Decision Tree
Expected
NPV
Expected
NPV
High Sales
60%
$
$75M
Low Sales
40%
Process A
Expected
NPV
$40M
61.00
Manufacturing Process
High Sales
60%
Low Sales
40%
$
$90M
Low Sales
40%
Process B
$10M
High Sales
60%
High Compound
$
Cost 30%
$60M
$30M
40.00
58.20
Low Compound
$
Cost 70%
66.00
The best option would be to choose Process A because it would yield the
greatest expected NPV of $61M whereas Process B would yield $58.20M.
It would only yield higher NPV of there was a low compound cost ($66M)
and under a high compound cost $40M