1 Exeecise 4. 2 3 Expansion decision 4 Demand for your product is expected to increase but your marketing people are divided as to whether there wil 5 be high growth or low growth. The final consensus is that the probability of a high growth is 70% 6 while there is a 30% probability that growth will be low 7 The gain if there is high growth is $5,000,000 8 The gain if there is low growth is $ 1,000,000 9 (these are either/or scenarios - so you either have high growth or low growth 10 11 value 12 low growth P 0.30 S 1,000,000 13 high growth P 0.70 $5,000,000 14 You need to decide whether to invest on an expansioand if so whether to go for a large expansion or a small expansion 15 16 17 18 if you don't expand, you will still capture 70% of the low growth value 19 no expansion gain 70% of low growth 20 no added costs 21 if you invest on a small expansion you capture 100% of the value if there is a low growth // you capture 40% of the value it 22 there is high growth 23 small expansion cost $ 500,000 24 gain 100% of low growth 25 40% of high growth 20 27 A large investment captures a 100% of value from both high and low growth 28 large expansion gain 100% of high or low growth 29 cost $ 2,000,000 30 31 32 33 GAIN COST 34 HIGH VALUE 35 NO EXPANSION $ 36 LOW 37 38 39 HIGH VALUE 40 SMALL $ $ EXPANSION P 1 LOW 11 HIGH LARGE EXPANSION VALUE $ LOW 42 43 44 45 46 47 48 49 50 51 52