ABC Company needs to increase its production beyond its existing capacity. It has narrowed the alternatives to two approaches to increase the production capacity: 1) Expansion at a cost of Sh. 8 million or 2) Modernization at a cost of Sh. 5 million Both approaches would require the same amount of time for implementation. Management believes that over the required payback period, demand will be either high or moderate. Since high demand is considered to be somewhat less likely than moderate demand, the probability of high demand has been set at 0.35. If the demand is high, expansion would gross an additional Sh. 12 million but modernization only an additional amount of Sh. 6 million, due to lower maximum production capacity. On the other hand, if the demand is moderate, the comparable figures would be Sh. 7 million for expansion and Sh. 5 million for modemization. Required: i. Calculate the conditional profit in relation to various action-and-outcome combination and states of nature. [6 marks] If the company wants to maximize its EMV, should it modernize or expand? [6 marks] dit iii. Calculate the EOL under both courses of action. ii. [4 marks] iv. Calculate the Expected Value of Perfect Information (EVPI). [4 marks]
