Determining the annual maintenance cost

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Reference no: EM131028015

The decision sciences department is trying to determine which of two copying machines to purchase. Both machines will satisfy the department's needs for the next ten years. Machine 1 costs $2,000 and has a maintenance agreement, which, for an annual fee of $150, covers all repairs. Machine 2 costs $3000, and its annual maintenance cost is a random variable. At present, the decision sciences department believes there is a 40% chance that the annual maintenance cost for machine 2 will be $0, a 40% chance it will be $100, and 20% chance it will be $200. Before the purchase decision is made, the department can have a trained repairer evaluate the quality of machine 2. If the repairer believes that machine 2 is satisfactory, there is a 60% chance that its annual maintenance cost will be $0 and a 40% chance it will be $100. If the repairer believes that machine 2 is unsatisfactory, there is a 20% chance that the annual maintenance cost will be $0, a 40% chance it will be $100, and a 40% chance it will be $200. If there is a 50% chance that the repairer will give a satisfactory report, what is EVSI? If the repairer charges $40, what should the decision sciences department do? What is EVPI?

Reference no: EM131028015

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