A company has the options of building a full size plant or a small plant that can be
expanded later. A market survey indicates that the probabilities of having a high
and low demand over the next 10 years are 0.75 and 0.25 respectively. The
immediate construction of a large plant will cost Rs. 5 million and a small plant will
cost only Rs1 million. The expansion of the small plant 2 years from now is
estimated to cost Rs4.2 million. Estimates of annual income for each of the
alternatives are given as follows:
- Full size plant and high demand will yield Rs. 1,000,000 annually.
- Full size plant and low demand will yield Rs. 300,000 annually.
- Small plant and low demand will yield Rs. 200,000 annually.
- Small plant and high demand will yield Rs. 250,000 annually.
- Expanded small plant with high demand will yield Rs. 900,000 annually.
- Expanded small plant with low demand will yield Rs. 200,000 annually.
(Note: Small plant with low demand after 2 years will not be expanded)
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