A manager is trying to decide whether to buy one machine or two. If only one is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales will be lost, however, because the lead time for producing this type of machine is six months. In addition, the cost per machine will be lower if both are purchased at the same time. The probability of low demand is estimated to be 0.20. The after-tax net present value of the benefits from purchasing the two machines together is $80,000 if demand is low and $180,000 if demand is high. If one machine is purchased and demand is low, the net present value is $110,000. If demand is high, the manager has three options. Doing nothing has a net present value of $110,000; subcontracting, $160,000; and buying the second machine, $130,000. a. Choose the correct decision tree for this problem. Note that each payoff is given in thousands of dollars.

A manager is trying to decide whether to buy one machine or two. If only one is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales will be lost, however, because the lead time for producing this type of machine is six months. In addition, the cost per machine will be lower if both are purchased at the same time. The probability of low demand is estimated to be 0.20. The after-tax net present value of the benefits from purchasing the two machines together is $80,000 if demand is low and $180,000 if demand is high. If one machine is purchased and demand is low, the net present value is $110,000. If demand is high, the manager has three options. Doing nothing has a net present value of $110,000; subcontracting, $160,000; and buying the second machine, $130,000. a. Choose the correct decision tree for this problem. Note that each payoff is given in thousands of dollars.

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 5P: Hudson Corporation is considering three options for managing its data warehouse: continuing with its...

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. A manager is trying to decide whether to build a small, medium, or large facility. Demand can be low, average, or high, with the estimated probabilities being 0.25, 0.40, and 0.35, respectively. A small facility is expected to earn an after-tax net present value of just $18,000 if demand is low. If demand is average, the small facility is expected to earn $75,000; it can be increased to medium size to earn a net present value of $60,000. If demand is high, the small facility is expected to earn $75,000 and can be expanded to medium size to earn $60,000 or to large size to earn $125,000. A medium-sized facility is expected to lose an estimated $25,000 if demand is low and earn $140,000 if demand is average. If demand is high, the medium-sized facility is expected to earn a net present value of $150,000; it can be expanded to a large size for a net payoff of $145,000. If a large facility is built and demand is high, earnings are expected to be $220,000. If demand is average for the…
Hudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?
Flanders Manufacturing is considering purchasing a new machine that will reduce variable costs per part produced by $0.15. The machine will increase fixed costs by $18,250 per year. The information they will use to consider these changes is shown here.
Shonda & Shonda is a company that does land surveys and engineering consulting. They have an opportunity to purchase new computer equipment that will allow them to render their drawings and surveys much more quickly. The new equipment will cost them an additional $1.200 per month, but they will be able to increase their sales by 10% per year. Their current annual cost and break-even figures are as follows: A. What will be the impact on the break-even point if Shonda & Shonda purchases the new computer? B. What will be the impact on net operating income if Shonda & Shonda purchases the new computer? C. What would be your recommendation to Shonda & Shonda regarding this purchase?
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Zeal Corporation is thinking about the dropping of its product Z.Sales of the product total Rs.400,000 per year; variable expensestotal Rs. 270,000 per year. Fixed expenses charged to the producttotal Rs. 150,000 per year. The company estimates that Rs.70,000 of these fixed expenses are not avoidable even if theproduct is dropped. If Product Z is dropped, what will be the netincrease or decrease in profit of the company?
Modern Artifacts can produce keepsakes that will be sold for $60 each. Nondepreciation fixed costs are $3,000 per year, and variable costs are $30 per unit. The initial investment of $3,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%. a. What is the accounting break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Accounting break-even level of sales: 120 units b. What is the NPV break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.) NPV break-even level of sales: 126 units c. What is the accounting break-even level of sales if the firm’s tax rate is 30%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Accounting break-even level of sales: 120 units d. What is the NPV break-even level…
Modern Artifacts can produce keepsakes that will be sold for $60 each. Nondepreciation fixed costs are $1,400 per year, and variable costs are $30 per unit. the initial investment of $5,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 12%. a). What is the accounting break-even level of sales if the firm pays no taxes? b).What is the NPV break even level of sales if the firm pays no sales? c). What is the accounting break even level of sales if the firms tax rate is 20%/ d). What is the NPV break even level of sales if the firms tax rate is 20%?