Question

A company MSL is trying to decide whether to make or buy a part (#E-19PGX). Purchasing the
part would cost 90 each. If they design and produce it themselves, it will result in a per-unit cost
of 75. However, the design investment would be 490,000. Further, they realize that for this type

of part, there is a 30% chance that the part will need to be redesigned at an additional cost of
1,200,000. Regardless of whether they make or buy the part, MSL will need 50,000 of these
parts. Using decision trees analysis to answer the following questions:
(a) What is the EMV of Make Decision?

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Answer 1

Note the Decision Tree as follows:

Buy 4500000 4500000 4500000 50,000 * 90 0.3 Re-design 4500000 Design 12000005440000 Produce 75440000 3750000 5440000 50.000 * 75 Produce 4240000 3750000 4240000 490000 4600000 0.7 Success 0 4240000

(a) What is the EMV of Make Decision? $4,600,000