1. 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 of 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 0.30 and the estimated probability of high demand is 0.70.

Never use plagiarized sources. Get Your Original Essay on
1. 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 of t
Hire Professionals Just from $11/Page
Order Now Click here

The net present value associated with the purchase of two machines initially is $75000 if demand is low and $130000 if demand is high.

The net present value for one machine and low demand is $90000. If demand is high, there are three options. One option is to do nothing, which would have a net present value of $90000. A second option is to subcontract; that would have a net present value of $110000. The third option is to purchase a second machine. This option would have a net present value of $100000

Open chat
Lets chat on via WhatsApp
Hello, Welcome to our WhatsApp support. Reply to this message to start a chat.