Reference no: EM132701367

Tri-State Technologies, Inc. (TST) is considering leasing a manufacturing facility for widgets. The cost of the lease is $1,000,000 per year. Under the proposed agreement, TST commits to a two-year lease. TST will operate the facility at full capacity in both years, producing 10,000 widgets each year.

TST currently sells widgets on the wholesale market for $100 per unit, but the price is subject to random fluctuations. TST estimates that, during the first year, the average price will be $100´(1+R1), where R1 is a normally distributed random variable with a mean of zero and a standard deviation of 30%. Similarly, the average market price for the second year will change relative to the first year's price by a factor of (1+R2), where R2 is a random variable independent of R1 and has the same distribution as R1. Assume that TST can sell all 10,000 widgets it produces in each year, and that all manufacturing costs are already included in lease payments.

Q1. For arbitrary values of R1 and R2 write an algebraic expression for TST's total net profit for the 2-year period. In other words, use variables R1 and R2 to generally represent the two yearly price fluctuations in the total profit expression, without computing any specific values.