23 A trucking company has decided to replace its existing truck fleet. Supplier A will provide the needed trucks at a cost of $700,000. Supplier B will charge $500,000, but its vehicles may require more maintenance and repair than those from supplier A.The trucking company is also considering modernizing its maintenance and repair facility either by renovation or by renovation and expansion. Although expansion is generally more expensive than renovation alone, it enables greater efficiency of repair and therefore reduced annual operating costs of the facility.The estimated costs of renovation alone and of renovation and expansion, as well as the ensuing operating costs, depend on the quality of the trucks that are purchased and the extent of the maintenance that they require. The trucking company therefore has decided on the following strategy: purchase the trucks now, observe their maintenance requirements for 1 year, then make the decision as to whether to renovate or to renovate and expand. During the 1-year observation period, the company will get additional information about expected maintenance requirements during years 2 through 5.

If the trucks are purchased from supplier A, then first-year maintenance costs are expected to be low ($30,000) with a probability of 0.7 or moderate ($40,000) with a probability of 0.3. If they are purchased from supplier B, then maintenance costs will be low

($30,000) with a probability of 0.3, moderate ($40,000) with a probability of 0.6, or high

($50,000) with a probability of 0.1.The costs of renovation, shown here, depend on the first year’s maintenance experience. Probabilities of various maintenance levels in years 2 through 5 depend on the types of trucks selected and the maintenance experience during year 1 (Table 18).

- EMV?

EVSI = EVPI Expected maintenance costs for years 2 through 5 can best be estimated after observing the maintenance requirements for the first year (Table 17).

One-year maintenance Renovation and requirements Renovation costs expansion costs Low $150,000 $300,000 Moderate $200,000 $500,000 High $300,000 $700,000 TABLE 17 Renovate, Renovate and expand, First-year maintenance years maintenance years Supplier maintenance 2–5 2–5 Low Moderate Low Moderate A

Low $100,000 $150,000 $40,000 $60,000 Moderate $100,000 $150,000 $40,000 $60,000 Moderate High Moderate High Low $150,000 $200,000 $50,000 $90,000 B Moderate $150,000 $200,000 $50,000 $90,000 High $250,000 $300,000 $70,000 $100,000 TABLE 18 Supplier First-year maintenance Maintenance level, years 2–5 Low Moderate High A Low 0.7 0.3 —
Moderate 0.4 0.6 —
B Low — 0.5 0.5 Moderate — 0.4 0.6 High — 0.3 0.7