A Chemical company has to expand its production capacity to cater its growing local and international market. It has to decide between a large plant and a small plant to be built to address the increasing demand. This is all that must be decided now. But if the company chooses to build a small plant, and then finds demand high during the initial period for two years, it has to expand its plant further. In making decisions, company executives must take account of the probabilities, costs, and returns which appear likely. On the basis of the data now available to them, and assuming no important changes in the companys situation, perform the following;

1. Develop a decision tree analysis for the Chemical company for this potential investment;
2. Determine the net expected monetary value EMV (revenue cost), and decide which alternative should

the company

Alternatives	Probabilities		Payoff per year
			(OMR/ year)
	High average demand	0.6	1,182,389
			(for 10 yrs)
Large Plant	High initial demand (2 yrs), low succeeding demand (8 yrs)	0.1	1,000,000
(cost 3.0 million OMR)			(first 2 yrs)
			100,000
			(succeeding 8 yrs)
	Low average demand	0.3	100,000
			(for 10 yrs)
	High initial average demand	0.7	465,138
Small Plant			(first 2 yrs)
(cost 1.3 million OMR)			-
	Low initial average demand	0.3	400,000
			(for 10 yrs)

Table Q4-2 : Alternatives, Probabilities & Payoffs when building a Small plant with High initial average demand

(succeeding 8 years)

Alternatives after 2 years of having Small- Plant with high initial average demand	Probabilities		Payoff per year
			for succeeding 8 years
			(OMR/ year)
Expand	High average demand	0.86	700,000
(cost 2.2 million OMR)	Low average demand	0.14	50,000
Do not expand	High average demand	0.86	300,000
	Low average demand	0.14	400,000