The EPA has defined new exposure standards, but it has not yet set a timetable for compliance with the permanent standard. It has established a minimum interim standard. Preliminary indications are that the volume of waste will double when the new standard is imposed. Even the interim standard, at pricing levels used in an earlier feasibility study, will produce a net annual revenue of about $900,000 to the company. This should also double when the permanent standard is implemented. The timing of the permanent standard depends on an EPA study of economic consequences that will take almost two years to complete. The companys director for governmental relations, guesstimates that the permanent standard will become effective in 3, 5, or 10 years with respective probabilities of 20%, 50%, and 30%.

The director of engineering has had his staff estimate three alternatives. The structure can be sized to meet the volume of the interim or of the permanent standard. If the smaller size is built, it can include some utilities and facilities to support the later expansion. In each case initial construction includes one treatment process line and the building to contain it. The difference between the options focus on whether the building has room for the larger treatment process line. In each case the equipment of the larger treatment line will only be purchased and installed when it is needed.

Alternative M (Minimal)

The minimal facility sized for the interim standard will cost $6 million. Expanding it for the permanent standard will cost another $5 million later. This facility will cost $200,000 annually to operate initially, the it will double when expanded.

Alternative S (Staged)

Construction can be staged by sizing utilities, loading docks, etc., to support later expansion. This adds very little to the annual operating costs (could be ignored), but it does increase initial construction costs by $1.15 million compared with alternative M. In return, the expansion will only cost $3 million later.

Alternative A (All)

Construction of all of the project can be undertaken immediately. Initial construction costs are $9 million, and annual operating expenses increase. However, POC can use the extra building space for warehousing. The value of this use about equals the increased operating cost.

Each construction stage will take about a year, with the bulk of the costs occurring at the start of the year. Other costs and revenues can be evaluated as end-of-year cash flows. Assume POC uses a 30-year horizon, and a MARR of 10%.

1. Evaluate the three alternatives. This evaluation should consider both the expected value and risk of the return with each option. Which alternative should be selected and why?

2. Please conduct sensitivity analysis for part 1.

3. If POC starts construction in the near future, there is a 5% chance that a new competitor might start a plant as well. This would cut POCs market in half. If delays for two years, this probability goes up to 15%. Whats your recommendation?