Management at the Doctors Bone and Joint Clink is considering whether to purchas

Question

Management at the Doctors Bone and Joint Clink is considering whether to purchase a newly developed MRI machine which they feel will provide the basis for better diagnoses of foot and knee problems The new machine is quite expensive and will be used for a number of years The clinic's CFO asked an analyst to work up estimates of the NPV of the investment under three different assumptions about the level of demand for its use (high, medium, and low) The CFO assigned a 50 percent probability to the medium-demand state, a 30 percent probability to the high state, and the remaining 20 percent to the low state A tier making forecasts of the demand for the machine based on the CFO's judgment and past utilization rates for MRI scans, the following NPV estimates were made: What is the expected NPV for the MRI machine based on the above estimates? How would you interpret the meaning of the expected NPV? Does this look like a good investment to you? Assuming that the probability of the medium-demand state remains 50 percent, calculate the maximum probability you can assign to the low-demand state and still have an expected NPV of 0 or higher.

Explanation / Answer

a) The Expected Net present value can be taken as weighted average for the MRI, Good Investment but 20% is negative for NPV

b) 30%

Because 0% is considered as low demand and maximum demand is 50% probability get from medium

All three states considered as 100%.

Already declared 50% is medium

Balance 50% is there =Already we have 30% in higher and 20% in lower, so we can't use this options

There is two options

LOW and High should be shared as 25% and 25%

or

Low should be taken 30% and high can be taken 20%

As per low maximum value is 30%

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