A Turkish company is going to establish a new factory. This company produced and sold 100000 products this year and wants to establish a new factory. The price per unit of the production is 100 TL. Demand is expected to grow. There are some downside risks if economy slides. From one year to the next, demand may increase by 20%, with probability of 0.6, or decrease by 10% with probability of 0.4.

This company has to decide whether to place a new plant in Turkey or China. The fixed and variable costs of two plants are shown below.

Turkish Plant

Chinese Plant

Fixed Cost (TL)

Variable Cost (TL)

Fixed Cost (Yuan)

Variable Cost (Yuan)

3 million/year

20/unit

3 million/year

36/unit

Turkish factory is more expensive due to flexibility. It can change production rate between 60,000 and 150,000 units per year while maintaining its variable cost. However Chinese plant is cheaper (1 = 1.12) but has limited volume flexibility and can produce only between 100,000 and 130,000 units per year.

Exchange rate are volatile, each year is expected to rise 10 percent, with probability of 0.7, or drop 10 percent with probability of 0.3. Decision is going to be made for the next three years and discount rate k=0.1.

The decision tree for this question is shown below: