A firm must choose between remaining where it is, with current capacity, and bui

Question

A firm must choose between remaining where it is, with current capacity, and building a new facility with 50% more capacity. The probability of high demand is estimated to be 75%. The current facility would provide $100,000 profit if there is high demand or $50,000 profit if there is low demand. The replacement facility would provide $160,000,000 profit if there is high demand but would only break even if there is low demand. What is the expected value of each option?

For replacement facility = $

For current facility = $

Explanation / Answer

A firm must choose between remaining where it is, with current capacity, and building a new facility with 50% more capacity. The probability of high demand is estimated to be 75%. The current facility would provide $100,000 profit if there is high demand or $50,000 profit if there is low demand. The replacement facility would provide $160,000,000 profit if there is high demand but would only break even if there is low demand. What is the expected value of each option?

For replacement facility = $

For current facility = $

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.