A company has three alternative solutions. 1. Do nothing 2. Rearrange an existing area 3. Build an addition...

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Finance

A company has three alternative solutions.
1. Do nothing
2. Rearrange an existing area
3. Build an addition to the present area
Planning horizon is 5 years. The MARR is 30%.
If alternative 1 is chosen, the estimated present worth is$0.
If alternative 2 is chosen there is a 60% chance of competition.The estimated PW is $50,000 if there is competition and $30,000 ifthere is no competition.
If alternative 3 is chosen there is 20% chance of competition.The estimated PW is (-)$100,000 if competition and $90,0000 if nocompetition.
Based on PW what should the company do? Are there anyrisk-related factors that could cause a differentrecommendation?

Answer & Explanation Solved by verified expert

3.6 Ratings (630 Votes)

We will have to calculate the Expected Present Worth for each alternative to arrive at a decision as below PW Alternative 1 0 PW Alternative 2 Probability of CompetitionPW with Competition Probability of No See Answer

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A company has three alternative solutions.1. Do nothing2. Rearrange an existing area3. Build an addition to the present areaPlanning horizon is 5 years. The MARR is 30%.If alternative 1 is chosen, the estimated present worth is$0.If alternative 2 is chosen there is a 60% chance of competition.The estimated PW is $50,000 if there is competition and $30,000 ifthere is no competition.If alternative 3 is chosen there is 20% chance of competition.The estimated PW is (-)$100,000 if competition and $90,0000 if nocompetition.Based on PW what should the company do? Are there anyrisk-related factors that could cause a differentrecommendation?