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A shelve manufacturer is developing a plan for the following two years. The question is
whether to lease a large workshop space with high production capacity or two workshop
spaces with a smaller capacity. The initial cost to lease a large workshop space is equal to
the total cost of leasing two smaller ones.
If the large workshop space is leased and customer demand is high, then NPV is $8,500,000
annually. If the large workshop is leased and customer demand is low, then NPV is
$4,500,000.
If two small workshops are leased and demand is low, the total NPV is $6,500,000 but if they
experience high demand, the total NPV of two small offices will be $8,000,000.
Some studies have been done on market dynamic and the market expert suggested that the
likelihood of high demand is 0.7.
Use the above information to determine which option returns the best NPV outcome in the
two-year period.
The rate of return is 0.1.
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