Refer to the following setting to answer the next 5 questions (i.e., Q6-10):

A chemical manufacturer is setting up capacity in Europe and North America for the next three years (i.e., Years 1-3). Annual demand in each market is 2 million kilograms (kg) and is likely to stay at that level. The two choices under consideration are: 1) building 2 million units of capacity in each of the two locations ("Option 1"), or 2) building 4 million units of capacity in North America ("Option 2"). 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, whereas the cost in Europe is 9 euro/kg. The current exchange rate is 1 euro for the U.S. $1.33. Over each of the next three years, the dollar is expected to strengthen (note: NOT rise) by 10 percent, with a probability of 0.5, or weaken (Note: NOT drop) by 5 percent, with a probability of 0.5. Assume a discount factor of 10 percent.

Question 6

What is the expected exchange rate for Year 1?

Group of answer choices

$1.33/Euro

$1.30/Euro

$1.26/Euro

$1.23/Euro

Question 7

What is the expected exchange rate for Year 2?

$1.33/Euro

$1.30/Euro

$1.26/Euro

$1.23/Euro

Question 8

How much is the total cost of Option 1 in Year 0?

$2,000,000

$22,189,013

$23,341,500

$25,940,000

Question 9

How much is the total cost of Option 1 in Year 3?

$2,000,000

$22,189,013

$23,341,500

$25,940,000

Question 10

Based on a decision tree analysis, which capacity decision should Wildcats choose?

Option 1

Option 2

Two options generate the same expected cost.