Case 1 background

The Mt Gambier Forestry Conference plans to invest in a smart fire detection system to replace the human fire tower reporting method which has been used for over 30 years. The smart system has an expected annual benefit of $900,000 with a probability of 20%, and $100,000 with a probability of 70%, and a low probability of benefit of $1500000. The smart system has an expected life of 5 years and a twice likely life of 7 years.

1. Please calculate the probability of a benefit of $1,500,000 and prepare a bar chart of probability for benefits of $100,000, $900,000 and $1,500,000 for the smart system
2. If the Mt Gambier Forestry Conference has an initial cost of $2,000,000, and they use an interest rate of 9%. Please calculate joint probability of present worth in the template table provided.

Annual Benefit	Probability	Life (years)	Probability	Joint Probability	PW	PW*Joint Probability
$900,000
100,000
1,500,000
$900,000
100,000
1,500,000

Case 2 background

The food industry strategies a new project of manufacturing recyclable plastic container,

Recyclable plastic container used at

Investment cost: $25000

Annual operation: $10000 then $200 per year

Annual cost for hygiene risk of breakdown: $600 per year, then increase by $200 per year

Useful life: 7 years

Minimal acceptable return rate:5%

Calculate marginal cost of keeping this asset over its useful lifetime, the market value of the machine is given below.

Market value

18000

13000

9000

6000

4000

3000

2500

3. Please calculate the marginal cost of keeping this asset over its useful life of 7 years.

Year, t	Loss in Salvage Value in Year t	Interest in Year t	O&M Cost in year t	cost of breakdown Risk in Year t	Total marginal cost in year t
1
2
3
4
5
6
7

4. Explain the meaning of the marginal cost of the recyclable container project.