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

Question

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 probabilty of low demand is 30, and the estirsated probability of high demand is .70. The net present value associated with the purchase of two machines initially is $76,700 if demand is low and $137,600 if demand is high The net preseat value for one machine and low demand is $93,000. If demand is high, there are three options. One optice is to do sothing, whach would have a net present value of $96,000 A subcontract, that would have a net present value of $89,000 The third option is to purchase a second machine. This option would have a net present value of $135,000 a What is the EMV (expected monetary value) for alternative buy one machine? The EMV is b What is the EMV (ex option is to

Explanation / Answer

Probability of low demand = .3

Probability of high demand = .7

A.

EMV (For alternative buy one machine) = .3*93000 + .7*135000 = $122400

B.

EMV (For alternative buy two machine) = .3*76700 + .7*137600 = $119330

C.

No. of machines, to be purchased by the manager = 1 machine

Because, EMV of buy 1 machine alternative is relatively high.

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