A chemical manufucturer is setting up capacity in europe

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A chemical manufucturer is setting up capacity in Europe and North America for the next three years, Annual demand in each market 2 million Kilograms(kg) and is likely to stay at that level, the two choice under concideration are buildind 4 million unit of capacity in North America and building and building 2 million units of capacity in each of two location,building two plants will incur an additional one-time cost of 2 million the variable cost of production in North America (for eather large or small plant) is currently $10/Kg, while the cost in Europe is 9eu/kg,the current exchange rate is 1 euro for US$1.33 over each of the next three years the dollar is expected to strengthen by %10 with probability of 0.5 or weaken by 5% with probability of 0.5, Assume a discount rate factor of 10%, what should the chemical manufucturer do? at what initial cost differential from building the two plants will the chemical manufucturer be indifferen between the two option? 

Reference no: EM13507546

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