NorthPole Refrigerators is a white goods manufacturer that serves the European market and has recently entered the Chinese market. Current annual demand of its products in China is 4 million, whereas the demand in Europe is 8 million. Over the next two years, the demand in China is expected to go up either by 75 percent, with a probability of 0.6, or by 40 percent, with a probability of 0.4. Over the same period, the demand in Europe is expected to go up by 15 percent, with a probability of 0.5, or go down 15 percent, with a probability of 0.5.

NorthPole currently has a production facility in China with a capacity of 4.5 million units per year and a facility in Europe with a capacity of 8.5 million per year. The variable production cost per unit in China is

€50, and the variable cost per unit in Europe is €60. It costs €25 to ship a unit between the two markets. Each unit sells for €200 in both markets.

NorthPole is in the process of deciding whether to add 3 million units or 2 million units of capacity to the China plant. The larger plant increase will cost €25 million, while the smaller addition will cost €20 million. Assume that NorthPole uses a discount factor of 15 percent.

What would you recommend?