Question 4: 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 company's situation, perform the following: (1) Develop a decision tree analysis for the Chemical company for this potential investment; (15) (ii) Determine the net expected monetary value EMV (revenue-cost), and decide which alternative should the company [10] Table Q4-1 Probabilities Alternatives 0.6 High average demand Large Plant High initial demand (cost 3.0 million OMR) (2 yrs), low succeeding demand (8 yrs) Low average demand High initial average Small Plant demand (cost 1.3 million OMR) Low Initial average demand Payoff per (OMRI year) 1198,695 (for 10 yrs) 1,000,000 (first 2 yrs) 100,000 (succeeding 8 100,000 (for 10 yrs) 541.497 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 Payoff per years of having year for Small- Plant with Probabilities succeeding high initial average demand (OMRI year) Expand High average 0.86 700,000 (cost 2.2 million OMR) Low average 0.14 50,000 demand High average 0.86 300,000 Do not expand Low average 0.14 400,000 demand