Due to increased product demand, a company has insufficient floor space in its c
ID: 1122687 • Letter: D
Question
Due to increased product demand, a company has insufficient floor space in its current production facility. Three alternative solutions have been identified: (A1) do nothing. (A2) rearrange an area of the existing floor space, or (A3) build an addition to the present plant. Analysis is conducted assuming a five-year planing horizon and an MARR of 30%. There is some uncertainty as to whether the company will face competition for the new business. If alternative A1 is pursued, the estimated Present Worth will be $0. If alternative A2 is chosen, the Present Worth realized will depend on whether competition arises. Under A2, there is a 60% chance of competition occurring. The estimated PW under A2 will be $50,000 if competition arises; $30,000 if there is no competition. Under A3, there is a 20% chance of competition. The estimated PW under A3 will be -$100,000 if competition arises, $90,000 if there is no competition.
(a) Based on expected PW, what course should the company follow?
(b) Are there any risk related factors that might make you give a different recommendation than the one you have given under (a)? Explain
Explanation / Answer
a. In the above questions there are three alternatives and the best one that we choose is 2nd alternative ie. rearrange an area of the exisiting floor space. If we rearrange the areas of the exisitng floor space it will help us in the occuring of the competition as we compared with the other two. Secondly, there is around 60% chance of the competition and as we compared with other two there is a high percentage and the company should follow Alternative 2 based on expected PW.
b. Although the risk arises when there is no competition as $30,000 is there and we compare with Alternative 3 there is $90,000. So it is the most important factor that would might affect the company.
The recommendation that we give is that should rearrange the area of the existing floor so that there would be competition and if there would be competion the estimated PW will be around $50,000 and this would be helpful for the company.