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:
(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?