Flexicomp is a computer manufacturer that currently makes its computers in California. The manufacturing cost at the California plant is $

$3$

$0$

$0$

$$per computer. Flexicomp sells the computers for $

$1$

$5$

$0$

$0$

$.$

$$Its current yearly demand is

$5$

$0$

$0$

$0$

$$computers$.$ Flexicomp estimates that each year, demand has a

$5$

$0$

$$percent chance of increasing

$1$

$0$

$$percent from the year before and a

$5$

$0$

$$percent chance of remaining the same as the year before. The California facility has a capacity of

$5$

$0$

$0$

$0$

$$units$.$ Flexicomp is considering two options. The first option is to build a new facility in New York. The new facility will have a capacity of

$2$

$0$

$0$

$0$

$$and Flexicomp will incur a one time cost of $

$1$

$,$

$0$

$0$

$0$

$,$

$0$

$0$

$0$

$.$

$$The manufacturing cost at the new facility will be $

$2$

$5$

$0$

$$per unit because of updated facilities. The second option is to buy pre

$-$

assembled computers from Compco when demand goes over

$5$

$0$

$0$

$0$

$.$

$$The current cost of preassembled computers from Compco is $

$7$

$0$

$0$

$$per unit. Flexicomp expects Compco to increase its prices each year. Flexicomp estimates that each year there is a

$5$

$0$

$\%$

$$chance that the price will increase by

$1$

$0$

$\%$

$$or there is a

$5$

$0$

$\%$

$$chance that the price will increase by

$5$

$\%$

$.$

$$ Use a decision tree to determine which option Flexicomp should use. Consider the expected profits from the current year, and the next two years in your decision making process. Assume a discount factor of

$1$

$0$

$\%$

$$over the next two year

For the compco outsourcing scenario there are four distinct possibilities one year into the future and

$9$

$$distinct possibilities two years into the future. You have to enumerate all the possibilities and evalute the net profit for each possibility in the future before finding the current NPV

$.$Please show me the steps to solve this portion of the question. Calculate the expected profits for the next two years using a decision tree.

Explanation:

Construct the decision tree by considering the possible scenarios for demand and Compco's price changes. Calculate the profit for each scenario and find the expected value by taking the weighted average based on the probabilities.

Option $1$: Build a new facility in New York

Option $2$: Outsource to Compco when demand exceeds $5000$ units and this questionCalculate the net present value $($NPV$)$ for each option by discounting the expected profits for the next two years and adding them to the current year's profit.

Option $1$: Build a new facility in New York

NPV $=$ Current year's profit $+($Expected profit in year $1/(1+$ discount rate$))+($Expected profit in year $2/(1+$ discount rate$)^2)$

Option $2$: Outsource to Compco when demand exceeds $5000$ units

NPV $=$ Current year's profit $+($Expected profit in year $1/(1+$ discount rate$))+($Expected profit in year $2/(1+$ discount rate$)^2)$

Explanation:

Compare the NPV values for both options and choose the option with the higher NPV as the recommended decision.