Discuss what issues would be involved in a capacity expansion, in particular the

Question

Discuss what issues would be involved in a capacity expansion, in particular the timing and size of the expansion. What would be the advantages and disadvantages of an expansionist vs. wait-and-see strategy? Which one would you recommend? For the capacity expansion decision above, describe how you would use cash flow analysis to assess the financial impact of the decision. What are the uncertainties involved in the expansion decision? Describe how you would use decision tree analysis to assist with the decision.

Explanation / Answer

Alliance Pipeline company I have chosen. They are going to expand their business due to high demand of transportation service to the Chicago market hub.

Issues involve in the expansion are as follows:

Advantages and Disadvantages of an expansionist vs wait and watch strategy are as follows:

Advantages:

Disadvantages:

I would recommend that have to go with the expansion of the business in case if business have the efficiency to resist with the expansion.

The cash flow analysis to access the financial impact of decision would be on the basis of the comparison of the previous year balance sheet with no expansion and after expansion. Find out the Profitability ratios on the basis of the cash flow Analysis. The percentage changes with the business model would show the increase or decrease of the growth of the business.

There is an Uncertainty involve in expansion because expansion does not always mean that business would be profitable in future. The dynamic environment has different directions to dislocate the business from the path. Here it is based on the analysis and the assumption that it would happen. The market trend, inflation rate, per capita income, growth rate etc. would affect the business.

Decision tree analysis is used to analyse the situation step by step. It is the structural form of decision making. The Decision tree would be prepared with the cost analysis on the particular decision and chance of probability to occur success or failure on each decision. It would help in the process of business expansion or in any business decision making.

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