Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A firm has to decide whether to (1) stay with current machine as it is, or (2) upgrade it with an enhancement, or (3) buy

A firm has to decide whether to (1) stay with current machine as it is, or (2) upgrade it with an enhancement, or (3) buy a new machine. Cost of upgrade is $1000, and the cost of a new machine is $8000. Revenues are estimated as follows, based on the performance of the economy next year:

stagnant economy

growth economy

no change

8000

8000

upgrade

8500

10000

new machine

8500

18000

It is estimated that the probability of a stagnant economy next year is 0.79 (so probability of a growth economy is 1 - 0.79).

What is the highest expected payoff among the three alternatives? (Note: need the value of the highest expected payoff, not the name of the alternative with the highest expected payoff)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cost Benefit Analysis

Authors: Harry F. Campbell, Richard P.C. Brown

3rd Edition

1032320753, 9781032320755

More Books

Students also viewed these Finance questions