Question

A manager must decide how many machines of a certain type to buy. The machines will...

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 $79,200 if demand is low and $130,600 if demand is high. The net present value for one machine and low demand is $99,000. If demand is high, there are three options. One option is to do nothing, which would have a net present value of $124,680. A second option is to subcontract; that would have a net present value of $115,650. The third option is to purchase a second machine. This option would have a net present value of $123,540.

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.

Homework Answers

Answer #1

a) EMV for one machine = Probability of Low Demand X Net Prsent Value + Probability of High Demand X Net present value

= 0.3 X 99000 + 0.7 X 124680 [out of 3 options with high demand and one machine, the option with highes NPC has been chosen]  

=$116076

b) EMV with two machines = Probability of Low Demand X Net Prsent Value + Probability of High Demand X Net present value

= 0.3 X 79200 + 0.7 X 130600 = $115180

c) Since expected value is more with one machine, the manager should purchase one machine initially

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A manager is trying to decide whether to buy one machine or two. If only one...
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...
A manager must decide which type of machine to buy, A, B, or C. Machine costs...
A manager must decide which type of machine to buy, A, B, or C. Machine costs (per individual machine) are as follows: Machine Cost A $40,000 B $30,000 C $80,000 Product forecasts and processing times on the machines are as follows: Product Annual Processing Time Per                            Demand A B C 1 18,000 4 2 1 2 20,000 1 5 3 3 20,000 5 6 6 4 16,000 4 6 3 a)Assume that only purchasing costs are being considered. Compute the...
Best Buy USA must to decide whether to build a new distribution center in Paramus, New...
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 costs and expected returns have been thoroughly estimated but one big question remains: what will be the general level of the demand for the entire range of products that Best Buy USA distributes? Three...
A manager in a manufacturing company is trying to decide whether to expand the present production...
A manager in a manufacturing company is trying to decide whether to expand the present production facility, or subcontract to increase production capacity, or to build a new production facility. Depending on future demand levels, the payoffs (or losses in $thousands) associated with the alternatives have been estimated and placed in the following table:                                                                                                                         High Demand    Moderate Demand   Low Demand                         Expand                  200                          100                       -25 Alternatives    Subcontract          225                          50                       25                         Build                   ...
BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...
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: $19,500 Estimated annual cash inflows: $39,500...
Bonita Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...
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...
"A company is considering two types of machines for a manufacturing process. Machine A has an...
"A company is considering two types of machines for a manufacturing process. Machine A has an immediate cost of $87,000, and its salvage value at the end of 8 years of service life is $29,000. The operating costs of this machine are estimated to be $5700 per year. Extra income taxes are estimated at $1500 per year. Machine B has an immediate cost of $44,000, and its salvage value at the end of 8 years' service is neglible. The annual...
"A company is considering two types of machines for a manufacturing process. Machine A has an...
"A company is considering two types of machines for a manufacturing process. Machine A has an immediate cost of $61,000, and its salvage value at the end of 4 years of service life is $14,000. The operating costs of this machine are estimated to be $3900 per year. Extra income taxes are estimated at $1800 per year. Machine B has an immediate cost of $45,000, and its salvage value at the end of 4 years' service is neglible. The annual...
BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...
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 $75,700 $189,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,800 $39,800 Estimated annual cash outflows $4,990 $10,100 Calculate the net present value and profitability index of each machine. Assume...
BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it...
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 $77,000 $188,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,900 $40,200 Estimated annual cash outflows $4,800 $9,860 Calculate the net present value and profitability index of each machine. Assume...