1. [25 points] A firm must decide between constructing a new facility or renting a comparable office space. There are two random outcomes for acquiring space, as shown in the following figure. Each would accommodate the expected growth of this company over the next 10 years. The cost of rental space is expected to escalate over the 10 years for each rental outcome. The option of constructing a new facility is also defined in the figure. An initial facility could be constructed with the costs shown. In five years, additional space may be required. At that time, there will be an option to build an office addition or rent space for the additional space requirements. The probabilities for each alternative are shown in the figure below. Which course of action should be recommended at decision point 1? [Note: At decision point 2, the PW(10%) of the lower branch is -$5,111.14K and the PW(10%) for the upper branch is -$4,119.06K. O&M is the annual operating and maintenance expense.] O&M: 900K/yr (10 yrs) R O&M: 700K/yr (10 yrs) Investment: -25K 1 RA PW = -4,119.06K 2 Investment: -10.5M PW=-5,111.14K Resale: +17M at EOY 10 O&M: 200K/yr (5 yrs) B BA B-build new facility R-rent new facility BA-build addition RA-rent addition K-thousands M-millions -prob=0.55 O&M: 150K/yr (10 yrs) prob=0.60 O&M: 300K/yr (10 yrs) prob=0.20