(a):
Calculate the expected value.
(a):
Explanation of Solution
The decision tree is given below:
(b):
Calculate the expected present worth.
(b):
Explanation of Solution
The expected present worth for the expansion is $28,700.
The expected present worth (EPW) for the no expansion option can be calculated as follows:
The expected present worth for the no expansion option is $86,957. Since the expected present worth of the no expansion option is greater, select the no expansion option.
(c):
Calculate the expected present worth.
(c):
Explanation of Solution
Time period is denoted by ‘n’, which is equal to 3. The expected present worth (EPW) for the produce option can be calculated as follows:
The expected present worth for the produce option is -$47,934.
Time period 1 (n1) is 2. Cash flow is denoted by ‘CF”. Expected present worth (EPW) for the buy option can be calculated as follows:
The expected present worth for the buy option is -$236,379. Since the expected present worth for the produce option is greater, select the produce option.
(d):
Change in the expected present worth.
(d):
Explanation of Solution
As the time period is extended for three more years, the
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Chapter 18 Solutions
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