Question

A manager is trying to decide whether to buy one machine or two. If only one is purchased and demand proves to be excessive, the second machine - can be purchased later. Some sales will be lost, however, because the lead time for producing this type of machine is 6 months. In addition, the cost per machine will be lower if both are purchased at the same time. The probability of low demand is estimated to be 0.20. The after-tax net present value of the benefits from purchasing the two machines together is $90,000 if demand is low and $180,000 if demand is high.

If one machine is purchased and demand is low, the net present value is $120,000. If demand is high, the manager has three options. Doing nothing has a net present value of $120,000; subcontracting, $160,000; and buying the second machine, $140,000.

a. Draw a decision tree for this problem.

b.How many machines should the company buy

initially? What is the expected payoff for this

alternative?

Answer #1

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...

Best Buy USA must to decide whether to build a new distribution
center in Paramus, New Jersey, to serve its stores in the Northeast
region of the United States. The options it has can be simply
described as building a small, medium-size, or large facility. The
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Three...

BAK Corp. is considering purchasing one of two new diagnostic
machines. Either machine would make it possible for the company to
bid on jobs that it currently isn’t equipped to do. Estimates
regarding each machine are provided below. "Don't forget to view
the PV table if needed."
Machine A: Original Cost:
$74,000 Machine B: $179,000
Estimated life: 8 years
Estimated life: 8 years
Salavage value: 0 Salvage
value: 0
Estimated annual cash inflows:
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Longbottom Inc. needs
to buy one of two possible production machines. The cost and
subsequent cash flows generated by each machine are given
below:
A
B
C
1
Discount rate
11%
2
3
Year
Machine A
Machine B
4
0
-55,000
-70,000
5
1
20,000
30,000
6
2
25,000
25,000
7
3
30,000
20,000
8
4
15,000
9
5
10,000
The relevant discount
rate is 11% for both projects.
Part 1
What is the net
present value of machine A?...

Bonita Corp. is considering purchasing one of two new diagnostic
machines. Either machine would make it possible for the company to
bid on jobs that it currently isn’t equipped to do. Estimates
regarding each machine are provided below.
Machine A
Machine B
Original cost
$77,500
$186,000
Estimated life
8 years
8 years
Salvage value
0
0
Estimated annual cash inflows
$19,500
$39,600
Estimated annual cash outflows
$5,040
$9,800
Click here to view PV table.
Calculate the net present value and...

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available: Machine 190-3, which has a cost of $220,000, a 3-year
expected life, and after-tax cash flows (labor savings and
depreciation) of $97,000 per year; and Machine 360-6, which has a
cost of $320,000, a 6-year life, and after-tax cash flows of
$93,400 per year. Knitting machine prices are not expected to rise
because inflation will be offset by cheaper components...

BAK Corp. is considering purchasing one of two new diagnostic
machines. Either machine would make it possible for the company to
bid on jobs that it currently isn’t equipped to do. Estimates
regarding each machine are provided below.
Machine A
Machine B
Original cost
$74,500
$183,000
Estimated life
8 years
8 years
Salvage value
0
0
Estimated annual cash inflows
$20,300
$40,200
Estimated annual cash outflows
$5,100
$9,810
Click here to view PV table.
Calculate the net present value and...

BAK Corp. is considering purchasing one of two new diagnostic
machines. Either machine would make it possible for the company to
bid on jobs that it currently isn’t equipped to do. Estimates
regarding each machine are provided below.
Machine A
Machine B
Original cost
$76,900
$186,000
Estimated life
8 years
8 years
Salvage value
0
0
Estimated annual cash inflows
$19,600
$39,800
Estimated annual cash outflows
$5,150
$10,080
Click here to view PV table.
Calculate the net present value and...

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Diamond and Turf Inc. is considering an investment in one of two
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production of baseballs can be sold. The second machine is an
automatic packing machine for the golf ball line. The packing
machine will reduce packing labor cost. The labor cost saved is
equivalent to $19 per hour....

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