Operations and Supply Chain Management 14th Edition by Robert Jacobs,Richard Chase

Exercise 7

In considering a capacity expansion we have two alternatives. The first alternative is expected to cost $1,000,000 and has an expected profit of $500,000 over the next three years. The second alternative has an expected cost of $800,000 and expected profit of $450,000 over the next three years. Which alternative should we select, and what is the expected value of the expansion? Assume a 10 percent interest rate.