Decision tree analysis, Advanced Statistics

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Ask questioThe finance manager of ‘Softy’ baby soap manufacturing company being successful in
the first two years of the company’s operations is considering setting up another plant to
meet the growing demand for the product. If the demand is high the new project is
expected to earn Rs.5 million per annum and if demand is low it is expected to earn
Rs.2 million per annum. The probability that demand is high is 0.55.
The firm can set up either a large plant costing Rs.10 millions or a small plant costing
Rs.5 million. Both the plants will take one year to build and as such no profits are
earned in year 1. Both the plants have an estimated life of four years after which their
value is considered to be negligible.
In case of high demand, the firm can expand the small plant in year 2 at an additional
cost of Rs.6 million. Alternatively, in case of low demand, the firm can reduce the large
plant in year 2 and recover Rs.3 million. Expansion or reduction of plant size will take a
whole year, so that in such case no profit will be earned in year 2.n #Minimum 100 words accepted#

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