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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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Transcribed Image Text

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?

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