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5. A decision maker is faced with two decisions of building a large plant strategy A) and a small plant (strategy B). Two things can

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5. A decision maker is faced with two decisions of building a large plant strategy A) and a small plant (strategy B). Two things can happen, either there will be high demand or demand will be low. The cost of building the large plant now is GH2 million and the cost of the small plant is GHet million. If the small plant is built and demand tends to be high, they can expand after two years. The cost of expansion is GHe 1.5 million. They would be faced with chances of high or low demand. The probabilities of high and low demand are 0.7 and 0.3 respectively. If he decides to build a large plant and there is high demand the cash flow will be GH500,000 for 7 years and if there is low demand the cash flow will be GHe100,000 for seven years. If he builds a small plant and there is high demand, they can expand after two years and the cash flow is GH300,000 per year for two years. The cash flow for the remaining 5 years will be GH600,000 per year for high demand. For low demand the cash flow will be GH100,000 per year for five years. Corresponding cash flow for not expand for high demand and low demand will be GH 300,000 per year for five years and GH150,000 per year for five years respectively. On the hand, if he builds the small plant and the demand is low, the cash flow will be GHe180,000 for 7 years. What, in your opinion, is the best strategy

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