Reference no: EM132939944

ABC Company 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 expects 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 $7 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 0.20 and the probability of it being low is 0.80. Not constructing a new factory would result in no addition revenue being generated because the current factories cannot produce these new products. For this analysis, use only the information provided.

Problem 1: Based on your analysis and using an expected value approach, which facility should be built?