Your company has a customer who is shutting down a production line, and it is yo

Question

Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $350,000. Your dealings on the secondhand market lead you to believe that if you commit to a price of $400,000, there is a 0.4 chance you will be able to sell the machine. If you commit to a price of machine to your company in the event that you are not be able to sell the machine.) $450,000 0.3 0.4

Explanation / Answer

Expected value = Posted price x probability of sale

Expected value would be maximized when one would commit to the price of $ 400000 (maximum expected value)

Posted price ($) Probability of sale Expected value ($) 500000 0.2 100000 450000 0.3 135000 400000 0.4 160000

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