Reference no: EM131202092
PLEASE SHOW DETAL IN ANSWERS
A company is planning to introduce a new product next month. Since new product is quite different than their current line, marketing department cannot give a specific sales forecast but do feel there is a 0.30 probability that demand for the new product will be low and 0.70 that demand will be high. Production manager must now decide on his equipment needs. If he buys one machine now and demand is low, the net present value (NPV) would be $90,000. If demand turns out to be high, he has three options.
He could do nothing with NPV of $80,000
Subcontract the extra work with a NPV of $110000
Add a second machine later which would bring the NPV to $100000
If he buys two machines now, NPV is $120000 if demand is high. If demand turns out to be low, he has two options:
He could do nothing with NPV of $75000
Do advertising with a NPV of $85000.
A. Draw a decision tree for the production manager’s decision
B. Would you recommend production manager buys one or tw0 machines? Show your complete computations.
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