Assignment:
The managers of a chemical company have to decide whether to extend their existing plant or replace it with completely new equipment. A simulation of the two alternatives gives the following probability distributions of net present value: 210 Applying simulation to decision problems Probabilities NPV ($m) Extend existing plant Replace with new equipment-3 to under -2 0.05 0.00-2 to under -1 0.05 0.05-1 to under 0 0.15 0.150 to under 1 0.29 0.261 to under 2 0.22 0.212 to under 3 0.14 0.183 to under 4 0.10 0.104 to under 5 0.00 0.05
(a) Compare the two distributions, and stating any necessary assumptions, determine the option that the management should choose.
(b) After the above simulations have been carried out a third possible course of action becomes available. This would involve the movement of some of the company's operations to a new site. A simulation of this option generated the following probability distribution.
Is this option worth considering? NPV ($m) Probability-2 to under -1 0.05-1 to under 0 0.050 to under 1 0.401 to under 2 0.402 to under 3 0.043 to under 4 0.034 to under 5 0.03.