(5) The managers of a chemical company have to decide whether to extend their existing plant or replace it with completely new equipment. A simulation of the two alternatives gives the following probability distributions of net present value:

(a) Compare the two distributions and, stating any necessary assumptions, determine the option that the management should choose.

(b) After the above simulations have been carried out a third possible course of action becomes available. This would involve the movement of some of the company’s operations to a new site. A simulation of this option generated the following probability distribution. Is this option worth considering?

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Probabilities Extend existing NPV ($m) plant Replace with new equipment -3 to under-2 0.05 0.00 -2 to under-1 0.05 0.05 -1 to under 0 0.15 0.15 O to under 1 0.29 0.26 1 to under 2 0.22 0.21 2 to under 3 0.14 0.18 3 to under 4 0.10 0.10 4 to under 5 0.00 0.05