Expando, inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. the company is currently considering two options. the first is a small facility that it could build at a cost of $7 million. if demand for new products is low, the company expects to receive $9 million in discounted revenues (present value of future revenues) with the small facility. on the other hand, if demand is high, it expects $14 million in discounted revenues using the small facility. the second option is to build a large factory at a cost of $8 million. were demand to be low, the company would expect $9 million in discounted revenues with the large plant. if demand is high, the company estimates that the discounted revenues would be $13 million. in either case, the probability of demand being high is .30, and the probability of it being low is .70. not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products.

the best decision to expando is
(a) to build the large facility.
(b) to build the small facility.
(c) to do nothing.

Blue computers, a major pc manufacturer in the united states, currently has plants in kentucky and pennsylvania. the kentucky plant has a capacity of 1 million units a year and the pennsylvania plant has a capacity of 1.5 million units a year. the firm divides the united states into five markets: northeast, southeast, midwest, south, and west. each pc sells for $1,000. the firm anticipates a 50 perc~nt growth in demand (in each region) this year (after which demand will stabilize) and wants to build a plant with a capacity of 1.5 million units per year to accommodate the growth. potential sites being considered are in north carolina and california. currently the firm pays federal, state, and local taxes on the income from each plant. federal taxes are 20 percent of income, and all state and local taxes are 7 percent of income in each state. north carolina has offered to reduce taxes for the next 10 years from 7 percent to 2 percent. blue computers would like to take the tax break into consideration when planning its network. consider income over the next 10 years in your analysis. assume that all costs remain unchanged over the 10 years. use a discount factor of 0.1 for your analysis. annual fixed costs, production and shipping costs per unit, and current regional demand (before the 50 percent growth) are shown in table 5-13. (a) if blue computers sets an objective of minimizing total fixed and variable costs, where should they build the new plant? how should the network be structured? (b) if blue computers sets an objective of maximizing after-tax profits, where should they build the new plant? how should the network be structured? variable production and shipping cost ($/unit) annual fixed cost northeast southeast midwest south west (million$) kentucky 185 180 175 175 200 150 pennsylvania 170 190 180 200 220 200 n. carolina 180 180 185 185 215 150 california 220 220 195 195 175 150 demand ('000 units/month) 700 400 400 300 600