A semiconductor company recognizes that there is shortage in chip supply and decides to build a new plant to meet the increasing demand. They have to to make a decision whether they should build a big plant or starts with a small one and expands the plant after 2 years (if the demand is remaining high). The decision will be made based on projected net cash flow generated in 10 years from various probable outcomes.

The assumptions:

Probably for High Average Demand: P_H = 60%; for low average demand : P_L = 40%

The cash flow the company is able to make:

Big Plant: a. High Demand yield $ 800,000 annually, b. Low Demand yield $100,000 annually

Small Plant with initial high demand: $450,000/yr for year 1-2 (2 years); after 2 years