2. Extended Learning Exercise A firm must decide between constructing a new facility or renting a comparable office space. There are two random outcomes for acquiring space, as shown in the figure below. Each would accommodate the expected growth of this company over the next 10 years. The cost of rental space is expected to escalate over the 10 years for each rental outcome. The option of constructing a new facility is also defined in the Figure below. An initial facility could be constructed with the costs shown. In five years, additional space will be required. At that time, there will be an option to build an office addition or rent space for the additional space requirements. The probabilities for each alternative are shown. MARR for the situation is 10% per year. A PW analysis is to be conducted on the alternatives. Which course of action should be recommended? Note: At 2, the PW(10%) of the upper branch is -$5,111.14 k, and the PW(10%) for the lower branch is -$4,119.06 k. O&M = Annual operating and maintenance expense O&M = $900 k/year (10 years) 0.55 Inflates at 7 %/year R O&M = $700 k/year (10 years) Inflates at 10 %/year Investment = -$25 k O&M = $250 k/year (5 yr) 0.75 Investment = -$5.5 mil Resale + $2.0 mil BA at EOY 10 Investment O&M = $150 k/year (5 yr) 0.25 =-$10.5 mil PW =-5,111.14 k Resale + $17 mil 2 Investment PW = -4,119.06 k at EOY 10 $25k O&M = $1.0 mil/year (5 yr) 0.60 B O&M = $200 k/yr(5 yr)( RA O&M = $1.2 mil/year (5 yr) B - Build New Facility R - Rent New Facility O&M = $150 k/year (10 years) 0.60 BA - Build Addition RA - Rent Addition O&M = $300 k/year (10 years) 0.20 k - thousands mil - millions Figure P12-25 Decision Tree Diagram for Problem 12-25