Buying Equipment The board of directors is faced with a decision on buying special equipment for a new product. The wisdom of the decision is ultimately dependent on total sales volume. Labor and associated variable costs per unit will be much less with the more elaborate equipment. Assume zero disposal values for the equipment: L01 TOTAL VARIABLE COSTS ORIGINAL PER UNIT OF EQUIPMENT COST PRODUCT M-1 $40,000 $4 M-2 95,000 3 Marketing executives believe that this highly specialized product will be salable only over the next year. They are very uncertain about sales prospects, but their best judgment of sales potential at $5 per unit is as follows:
TOTAL UNITS TOTAL SALES PROBABILITY 30,000 $150,000 ne.
50,000 250,000 4 60,000 300,000 LE 70,000 350,000 LZ Prepare an analysis to guide the board’s action.

PROPOSAL F PROPOSAL G Net Cash Net Cash Probability Inflow Probability Inflow 10 $3,000 10 $1,000 .25 4,000 .25 2,000 30 5,000 .30 3,000 .25 6,000 E25 4,000 tO) 7,000 10 5,000 . For each proposal, compute

(a) the expected value of the cash inflows in each of the next three years,

(b) the standard deviation, and

(c) the coefhcient of variation.
Which proposal has the greater degree of risk? Why?