Plant A: The plant contains a dual unit. The capacity is enough to serve the whole
market. The initial capital cost is $190,000, and the operating cost for each unit is $19,000
Plant B: The plant only contains a single unit. Hence the capacity of one plant B is only
enough to serve half of the market. The initial capital cost for one plant B is $100,000,
and currently the operating cost is $20,000 for the unit per year.
The operating cost for plant B is uncertain in the near future. Staring from next year, the cost
could be $30,000 or $10,000 per year, with equal likelihood. The revenue obtained from
serving the whole market is $60,000 per year. Assume that the revenue and operating cost
occur at the end of each year. The annual interest rate is 5%. Once the plants are built, they
operate over a long time.
Compare the following three strategies:
Strategy 1: start building a plant A now
Strategy 2: start building two plant B now (to serve the whole market)
Strategy 3: start building one plant B now (to serve only half of the market). In the next year,
build another plant B if the operating cost goes down, and build a plant A if the operating
cost goes up.
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