The managers of a chemical company have to decide whether toextend their existing plant or…

The managers of a chemical company have to decide whether toextend their existing plant or…

The managers of a chemical company have to decide whether toextend their existing plant or replace it with completely new equipment.A simulation of the two alternatives gives the followingprobability distributions of net present value:210 Applying simulation to decision problemsProbabilitiesNPV ($m)Extend existingplantReplace with newequipment-3 to under -2 0.05 0.00-2 to under -1 0.05 0.05-1 to under 0 0.15 0.150 to under 1 0.29 0.261 to under 2 0.22 0.212 to under 3 0.14 0.183 to under 4 0.10 0.104 to under 5 0.00 0.05(a) Compare the two distributions, and stating any necessaryassumptions, determine the option that the management shouldchoose.(b) After the above simulations have been carried out a third possiblecourse of action becomes available. This would involve themovement of some of the company’s operations to a new site.A simulation of this option generated the following probabilitydistribution. Is this option worth considering?NPV ($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

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