Question
Cliff Corp. (CC) makes widgets and is considering purchasing an automated machine to make widgets. The widget machine has a 20% probability of breaking down
Cliff Corp. (CC) makes widgets and is considering purchasing an automated machine to make widgets. The widget machine has a 20% probability of breaking down irreparably at the end of each year (assuming it was working at the beginning of the year). The machine has a maximum 7-year life and has zero salvage value. What is the most likely number of years the machine will last and what is the value of the machine if it lasts this long? What is the expected number of years the machine will last and what is the value of the machine? What is the NPV of the machine? Should CC invest in the machine?
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