Your company is about to release a new product. They are unsure of what to expec

Question

Your company is about to release a new product. They are unsure of what to expect for Sales or Annual Costs. They believe one of 3 possible Annual Sales figures will occur, at the following probabilities. Furthermore, they believe their Annual Costs to support the produce are likely to be low, but, given that the product is utilizing a new manufacturing process, it is possible will be unreliable and costs to support it will be much higher than expected: What us the expected value for Annual Sales and for Annual Costs? Using those values, what us the expected AEW (Annual Equivalent Worth) of this product? What are the joint probabilities of the possible scenarios? What is the AEW each scenarios? Calculated the AEW using parts(c) and (d). Is your answer consistent with part (b)? Why or why not? What is the probability that the product will have a negative AEW? Suppose the company decides that, if the Annual Costs exceed $15,000, they will stop production after the first year. However, if annual costs are below $15,000, they will continue producing the product for 5 years. How can you model this? If the company uses a MARR of 10%, what is the new expected AEW for the scenario above, with N=5?

Explanation / Answer

a) EXPECTED VALUE FOR ANNUAL SALES=$40,000*0.25+$15,000*0.6+$10,000*0.15=$20,500

EXPECTED VALUE FOR ANNUAL COST=$7,500*0.9+$20,000*0.1=$8,750

b)ANNUAL EQUIVALENT WORTH OF THIS PRODUCT=$20,500-$8,750=$11,750

c)JOINT PROBABILITIES OF THE 6 POSSIBLE SCENARIOS:

d)AEW OF EACH SCENARIO

e)YES,THE AEW CALCULATED USING PART (c) AND(d) IS CONSISTENT WITH PART (b)

SCENARIOS PROBABILITY FOR ANNUAL SALES PROBABILITY FOR ANNUAL COST JOINT PROBABILITY 1 0.25 0.9 0.225 2 0.6 0.9 0.54 3 0.15 0.9 0.135 4 0.25 0.1 0.025 5 0.6 0.1 0.06 6 0.15 0.1 0.015

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