Galuppi plc is considering whether to scrap some highly specialized old plant or to refurbish it for the production of drive mechanisms, sales of which will last for only three years.
Scrapping the plant will yield £25 000 immediately, whereas refurbishment will require an immediate outlay of £375 000. Each drive mechanism will sell for £50 and, if manufactured entirely by Galuppi plc, give a contribution at current prices of £10. All internal company costs and selling prices are predicted to increase from the start of each year by 5 per cent. Refurbishment of the plant will also entail fixed costs of £10 000, £12 500 and £15 000 for the first, second and third years respectively. Estimates of product demand depend on different economic conditions. Three have been identified as follows:

Demand in subsequent years is expected to increase at 20 per cent per annum, regardless of the initial level demanded.
The plant can produce up to 20 000 drive mechanisms per year, but Galuppi plc can supply more by contracting to buy partially completed mechanisms from an overseas supplier at a fixed price of £20 per unit. To convert a partially completed mechanism into the finished product requires additional work amounting, at current prices, to £25 per unit. For a variety of reasons the supplier is only willing to negotiate contracts in batches of 2000 units.
All contracts to purchase the partially completed units must be signed one year in advance, and payment made by Galuppi plc at the start of the year in which they are to be used.
Galuppi plc has a cost of capital of 15 per cent per annum, and you may assume that all cash flows arise at the end of the year, unless you are told otherwise.
Requirements:
(a) Determine whether refurbishment of the plant is worthwhile.
(b) Discuss whether the expected value method is an appropriate way of evaluating the different risks inherent in the refurbishment decision of Galuppi plc.

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Economic condition Probability of occurrence Demand in the first year (units) 0.25 0.45 0.3 10000 15 000 20000