• • 5.25 A company has developed a promising new product and examines the following three alternatives of manufacturing.

Alternative 1 is to buy a semiautomatic machine with an initial cost of €130,000. Alternative 2 is to buy a fully automatic machine with an initial cost of €180,000. Alternative 3 is to outsource production (buy).

With Alternative 1, there is a 75% chance that 80 out of 100 products will be produced without defects and a 25% chance that 70 out of 100 products will be produced without defects. With Alternative 2, there is an 85% chance that 90 out of 100 products will be produced without defects and a 15% chance that 80 out of 100 products will be produced without defects. With Alternative 3, there is a 60% chance that 70 out of 100 products will be produced without defects and a 40% chance that there is about 50:50 chance that non-defective products will be produced. The company operates on a 12-month basis, with a monthly production of 6,000 units. The price per unit has been estimated to be €12 based on a production cost of €8. Draw a decision tree to reflect the three alternatives. Calculate the payoff associated with each, and point the alternative with the greatest EMV.