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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 0.52 (so probability of a growth economy is 1 - 0.52).

What is the expected payoff(= revenue - cost of new machine) of buying the new machine?

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