Reference no: EM131073884

A company has to decide whether to invest in a large and expensive new plant or in a small and cheaper new plant or in no plant at all. With the big and expensive plant and a favorable market, they estimated a $350,000 net present revenue over the next 5 years. If the market will not be favorable, they estimated a $100,000 net present total revenue. With the small plant, they estimated a $250,000 and $80,000 net present total revenue, respectively. The two plants costs $200,000 and $150,000, respectively. If the company estimates that the market will be favorable with 60% probability and unfavorable with 40% probability, (iv) advise them on which plant to invest on.

The company could also commission a $20,000 survey that can predict with more precision the future of the market. If the survey predicts a favorable market (you may still use the 60% probability for this), the market will be be favorable with a 80% probability, and if the survey predicts an unfavorable market (you may still use the 40% probability for this), the market will be be favorable with a 90% probability 1. In other words, the company would be paying a few dollars for a survey to give them more confidence before they decide whether or not to commit to a big dollar investment. Should the survey be commissioned?