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A chemical manufacturer is setting up capacity in Europe and North America for the next 3 years. Annual demand in each market is 2 million

A chemical manufacturer is setting up capacity in Europe and North America for the next 3 years. Annual demand in each market is 2 million kilograms (kg) and is likely to stay at that level. The two choices under consideration are building 4 million units of capacity in North America and building 2 million units of capacity in each of the two locations. Building two plants will incur an additional one-time cost of $2 million. The variable cost of production in North America (for either a large or a small plant) is currently $10/kg, while the cost in Europe is $9/kg. The current exchange rate is 1 euro for US$1.33. Over each of the next three years, the dollar is expected to strengthen by 10% with a probability of 0.5 or weaken by 5% with a probability of 0.5. Assume a discount factor of 10%.
1. What is the NPV value associated with building a 4 million units of capacity in North America?
2. What is the NPV value associated with building a building 2 million units of capacity in each of the two locations (North America and Europe)?

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