# Steve is the director of operations for Diamond Chemical Company Steve is the director of operations

Steve is the director of operations for Diamond Chemical Company
Steve is the director of operations for Diamond Chemical Company. The company is considering whether to launch a new product line, which will require building a new facility. The research required to produce the new product has not been proven to work in a full scale operation. If Steve decides to build the new facility and the process is successful, Diamond Chemical will realize a profit of \$ 750,000. If the process is unsuccessful, his company will realize a loss of \$ 900,000. Steve estimates the probability of the full scale process succeeding is 65%. Steve has the option to construct a pilot plant for \$ 60,000 to test the new process before deciding to build the full scale facility. From prior experience, Steve knows that there is an 81% probability that the pilot plant will be successful if the new facility proves to be successful. Likewise, there is a 16% probability that the pilot plant will be successful if the new facility proves to be unsuccessful.

a. Structure this problem with a decision tree and advise Steve what to do.

b. What is the most Steve should pay to construct the pilot plant?

Steve is the director of operations for Diamond Chemical Company