2. The Tarheel Manufacturing Company must decide whether to build a large plant or a small...

 

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2. The Tarheel Manufacturing Company must decide whether to build a large plant or a small one to process a new product with an expected life of 10 years. Demand may be high during the first 2 years, but if many users find the product unsatisfactory, demand will be low for the remaining 8 years. High demand during the first 2 years may indicate high demand for the next 8 years. If demand is high during the first 2 years and company does not expand within the first 2 years, competitive products will be introduced, thus lowering the benefits. If the company builds a large processing plant, it must keep it for 10 years. If its builds the small plant, the plant can be expanded in 2 years if demand is high, or the company can stay in the small plant while making smaller benefits on the small volume of sales. Estimates of demand are these: Probability High demand (first 2 years) 0.5 followed by high demand (next 8 years) High demand (first 2 years 0.1 followed by low demand (next 8 years) Low demand (first 2 years) followed by high demand (next 8 years) Low demand (first 2 years) 0.4 Low demand during first 2 years 0.4 followed by continuing low demand (next 8 years) Probability High demand during first 2 years 0.6 0 Financial costs and profits are as follows: A large plant with high demand would yield Php 1 million annually in profits. A large plant with low demand would yield Php 200,000 annually because of production inefficiencies. A small plant, not expanded, with a low demand would yield annual profits of Php 250,000 for 10 years. A small plant during a 2-year period of high demand would yield Php 450,000 annually: if high demand continued and if the plant was not expanded, this would drop to Php 300,000 annually for the next 8 years as a result of competition. A small plant which was expanded after 2 years would yield Php 100,000 annually for 8 years if low demand occurred during that period. A large plant would cost Php 5 million to build and put into operation. A small plant would cost Php 1.500,000 to build and put into operation. Expanding a small plant after 2 years would cost Php 2,500,000. Under the conditions stated and with the information furnished, analyze the alternatives and choose the best decision. 2. The Tarheel Manufacturing Company must decide whether to build a large plant or a small one to process a new product with an expected life of 10 years. Demand may be high during the first 2 years, but if many users find the product unsatisfactory, demand will be low for the remaining 8 years. High demand during the first 2 years may indicate high demand for the next 8 years. If demand is high during the first 2 years and company does not expand within the first 2 years, competitive products will be introduced, thus lowering the benefits. If the company builds a large processing plant, it must keep it for 10 years. If its builds the small plant, the plant can be expanded in 2 years if demand is high, or the company can stay in the small plant while making smaller benefits on the small volume of sales. Estimates of demand are these: Probability High demand (first 2 years) 0.5 followed by high demand (next 8 years) High demand (first 2 years 0.1 followed by low demand (next 8 years) Low demand (first 2 years) followed by high demand (next 8 years) Low demand (first 2 years) 0.4 Low demand during first 2 years 0.4 followed by continuing low demand (next 8 years) Probability High demand during first 2 years 0.6 0 Financial costs and profits are as follows: A large plant with high demand would yield Php 1 million annually in profits. A large plant with low demand would yield Php 200,000 annually because of production inefficiencies. A small plant, not expanded, with a low demand would yield annual profits of Php 250,000 for 10 years. A small plant during a 2-year period of high demand would yield Php 450,000 annually: if high demand continued and if the plant was not expanded, this would drop to Php 300,000 annually for the next 8 years as a result of competition. A small plant which was expanded after 2 years would yield Php 100,000 annually for 8 years if low demand occurred during that period. A large plant would cost Php 5 million to build and put into operation. A small plant would cost Php 1.500,000 to build and put into operation. Expanding a small plant after 2 years would cost Php 2,500,000. Under the conditions stated and with the information furnished, analyze the alternatives and choose the best decision.

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