2 Sodaco is considering producing a new product Chocovan sod

2 Sodaco is considering producing a new product: Chocovan soda. Sodaco estimates that the annual demand for Chocovan, D (in thousands of cases), has the following mass function: P(D = 30) = .30, P(D = 50) = .40, PID = 80) = .30. Each case of Chocovan sells for $5 and incurs a variable cost of $3. It costs $800,000 to build a plant to produce Chocovan. Assume that if S1 is received every year (forever), this is equivalent to receiving S10 at the present time. Considering the reward for each action and state of the world to be in terms of net present value, use each decision criterion of this section to determine whether Sodaco should build the plant.

Solution

Probablity P(D=30000) 0.3 P(D=50000) 0.4 P(D=80000) 0.3 Selling price 5 Variable cost 3 Profit per unit 2 Selling price-variable cost Demand Profit Probablity 30,000.00 60000 0.3 50,000.00 100000 0.4 80,000.00 160000 0.3 Expected profit 106000 Sumproduct of profit and probablity Discount rate 10% As it is said that 1$ for ever has PV of 10 so discount rate is 10% Initial cost to build the plant 800,000.00 PV of expected profit 1,060,000.00 Since the present value of expected profit is more than the initial cost Sodaco should build the plant