# A company can choose between two types of plant:  Plant A: The plant contains a dual unit. The capacity is…

A company can choose between two types of plant:
 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
per year.
 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.