Question
Computers manufacturer serving the Europe and Africa markets. Current annual demand of its product in Europe is 2 million, where the demand in Africa is
Computers manufacturer serving the Europe and Africa markets. Current annual demand of its product in Europe is 2 million, where the demand in Africa is 4 million. Over the next two years, demand in Europe is expected to go up either by 50 percent with a probability of 0.7, or by 20 percent with a probability of 0.3. Over the same period, demand in Africa is expected to go up by 10 percent with a probability of 0.5 or go down 10 percent with a probability of 0.5. The manufacturer currently has a production facility in Italy with a capacity of 2.4 million units per year and a facility in Egypt with a capacity of 4.2 million per year. The variable production cost per computer in Italy is $15, and the variable cost per computer in Egypt is $17. It costs $3 to ship a computer between the two markets. Each computer sells for $40 in both markets.The manufacturer is debating whether to add 2 million units or 1.5 million units of capacity to the Italy plant. The larger plant increase will cost $18 million, whereas the smaller addition will cost $15 million. Assume that the manufacturer uses a discount factor of 10 percent. What do you recommend if you know that the NPV for the large addition is $430,529,091?
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