Question
A company has to decide which of three machines to purchase to manufacture a product. Each machine has the same purchase price but the operating
A company has to decide which of three machines to purchase to manufacture a product. Each machine has the same purchase price but the operating costs of the machines differ. Machine A has low fixed costs and high variable costs; Machine B has average fixed costs and average variable costs; whilst Machine C has high fixed costs and low variable costs. Machine A would consequently be preferable if demand were low and Machine C would be preferable if demand were high. There is a 40 per cent chance that demand will be high, a 35 per cent chance that demand will be medium and a 25 per cent chance that demand will be low. The company uses expected value to make this type of decision. The estimated net present values for each of the possible outcomes are as follows: Demand Machine A Machine B Machine C High R110 000 R135 000 R175 000 Medium R140 000 R155 000 R145 000 Low R210 000 R105 000 R70 000 A market research company believes it can provide perfect information on product demand. Required: Calculate the maximum amount that should be paid for the information from the market research company
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