What is the cost of the test which will make us indifferent

Assignment Help Applied Statistics

Reference no: EM13784012

We need to acquire a piece of equipment. However, we are uncertain about its reliability. It might need a low, medium or a high number of repairs during its life. The present value ("PV") of the costs of the equipment over its life would be as follows:- If we buy the equipment and the level of repairs are low, medium, or high, the PV of the costs will be $500K, $800K or $1,500K respectively. If we rent the equipment, the PV of the rent will be $1,000K regardless of the repairs needed. This is because the rental company agrees to maintain the equipment for us. We estimate that the probabilities of the level of repairs being low, medium, or high are 10%, 50% and 40% respectively. Before we acquire the equipment, we have the opportunity to run a test on the equipment over a limited period. The test will suggest that the repairs might be low, medium or high. If the number of repairs over the life of the equipment is actually low, then there is a 70% chance that the test will also suggest that they will be low, a 20% chance that the test will suggest they are medium and a 10% chance that they will be high. If the number of repairs over the life of the equipment is actually medium, then there is a 15% chance that the test will suggest that they will be low, an 80% chance that the test will suggest they are medium and a 5% chance that they will be high. If the number of repairs over the life of the equipment is actually high, then there is a 4% chance that the test will suggest that they will be low, a 6% chance that the test will suggest they are medium and a 90% chance that they will be high. The cost of the test will be $50K.

Draw a decision tree to help you make a decision whether or not to conduct the pilot test.
Use Bayes' theorem to work out revised probabilities given the results of the test.
Should we conduct the test? Why?
If we conduct a test and it indicates a low repair rate, should we buy or rent the equipment ? Why?
If we conduct a test and it indicates a high repair rate, should we buy or rent the equipment ? Why?
What is the value of the information given by the test?
What is the cost of the test which will make us indifferent between running the test or not?
If we do not conduct the test, should we buy or rent the equipment ? Why?

Reference no: EM13784012

Questions Cloud

Calculate and tabulate the probability distribution of the : The total costs of a proposed project consist of fabrication costs and installation costs. Each cost is uncertain. Fabrication costs Probability Installation costs Probability $MM % $MM % 10 40% 5 25% 20 50% 10 60% 50 10% 30 15% 3.1. Assume that ther..

Continuing to do business with marshall : Review the Contracts Analysis Case Study prior to answering the questions listed below. Assignment: Write a legal analysis of at least 1,000 words that answers the following questions from both a legal and a spiritual perspective: 1. What should you ..

Research from the csu online library and the other sources : Research from the CSU Online Library and the other sources for the current desktop processors available from both AMD and Intel. Next, provide the requirements for several PC builds (a low cost computer, a mid-range, and a high- performance computer)..

Perform a hotelling t2 two sample test : Perform a Hotelling T2 Two Sample test to determine if a certain drug has any effect in reducing flue-like symptoms. Use alpha = 0.01.

What is the cost of the test which will make us indifferent : We need to acquire a piece of equipment. However, we are uncertain about its reliability. It might need a low, medium or a high number of repairs during its life. The present value ("PV") of the costs of the equipment over its life would be as follow..

Ideas about bureaucracy and administration similar : In what ways are Weber's and Fayol's ideas about bureaucracy and administration similar?

Most countries banned the most popular aerosol propellants : In the early 1990s, Cranston Dispensers, Inc. was quick to realize that concern for the environment would cause many consumer product manufacturers to move away from aerosol dispensers to mechanical alternatives that pose no threat to the ozone layer..

Co-founder and president of agape media : Co-founder and president of Agape Media, Dan Brown, doesn''t want to forget the early struggles he and partner Steve Jones, vice president of Production, endured to get their fledgling television and video-production business off the ground back in 2..

Create a stem and leaf chart for the variable money. : Create a stem and leaf chart for the variable money.

User Account

All Pages