Question

Question Completion Status: QUESTION 3 A manager must decide how many machines of a certain type to buy. The machines will be used to manufacture a new gear for which there is increased demand. The manager has narrowed the decision to two alternatives: buy one machine or buy two. If only one machine is purchased and demand is more than it can handle, a second machine can be purchased at a later time. However, the cost per machine would be lower if the two machines were purchased at the same time. The estimated probability of low demand is.30, and the estimated probability of high demand is.70. The net present value associated with the purchase of two machines initially is $76,600 if demand is low and $134,200 if demand is high. The net present value for one machine and low demand is $100,000. If demand is high, there are three nothing, which would have a net present value of $129,650. A second option is to subcontract; that would have a net present value of $117,880. The third option is to purchase a second machine. This option would have a net present value of S124,980. a. What is the EMV (expected monetary value) for alternative buy one machine? The EMV is $ b. What is the EMV (expected monetary value) for alternative buy two machines? The EMV is $ c. How many machines should the manager purchase initially? The manager should purchase machine(s) initially QUESTION 4

Answer 1

Page No ☺ Answer Question 3 @ EMV I buying one machine EMV of buying one machine = Atlow demand, net present value X probabilily of low demand) + (At high demand, net present value X probability of high demand) = ($100,000 X 0.30) + $129650X0.70) 3 30000 + 90755 = $120155 11EMv(expected monctary value) of buying one machine - $120755 ☺. Em og lenging too machines EMV of buying too machines = ($ 46,600 X0.30) + C$134200 X 0170) s 22980 + 93940 = 116920

Page No (@ EMV[expected monetany valve) of buying too machines = $116920 H The EMV of buying one machine is $120755 higher than the EMV of buying two machines is $1169 20 .:. The managers should buy one machine inibially.