Posted: September 18th, 2017
We are using: Identifying and Managing Project Risk: Essential Tools for Failure-Proofing Your Project [Hardcover] ,Tom Kendrick, AMACOM Books, 2009
A rigorous study conducted by a team of economic and financial experts indicates that over the required payback period, demand for the product will either be high or moderate. Since high demand is considered to be somewhat less likely than moderate demand, the probability of high demand has been estimated at 0.35. If demand is high, a new facility would result in an additional $25 Million in revenue, but expansion/upgrade only an additional $15 Million, due to lower maximum production capability. On the other hand if demand is moderate, the comparable figures would be $15 Million for a new facility and $10.0 Million for expansion/upgrade. (All costs and profit values are figured on a present value, using an appropriate rate of return)
If Cardinal wishes to maximize its expected monetary value, should it obtain a new facility or expand? Provide a decision tree or some other means of representing your calculation.What other factors might play into Cardinal’s decision whether to modernize or expand?
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