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Homework (WK3)

# Homework (WK3) - new factory would result in no additional...

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Week 3 CH5, Pages137-138, P5 Expando, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of \$6 million. If demand for new products is low, the company ex- pects to receive \$10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects \$12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of \$9 million. Were demand to be low, the company would expect \$10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be \$14 million. In either case, the probability of demand being high is .40, and the probability of it being low is .60. Not constructing a
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Unformatted text preview: new factory would result in no additional revenue being generated because the current factories cannot produce these new products. Construct a decision tree to help Expando make the best decision. A – Expected Net Present Value (NPV) = .40 X \$12m + .60 X \$10m - \$6m = \$4.8 million = \$4.8m + \$6m - \$6m = \$4.8 million = \$10.8m - \$6m = \$4.8 million B – Expected NPV = \$0 C – Expected NPV = .40 X \$14m + .60 X \$10m - \$9m = \$2.6 million = \$5.6m + \$6m - \$9m = \$2.6 million = \$11.6m - \$9m = \$2.6 million From this it looks like the best alternative is to build the small facility. References: http://highered.mcgraw-hill.com/sites/dl/free/007726259x/416102/jacobs_ch03.pdf Operations & Supply Management, Jacobs, Chase & Aquilano, Chapter 5, Pages 130-132, & 136...
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