Problem 3.a

A company is considering designing a new robot for their production line. The new design is based on the latest technology, and there is some uncertainty associated with the performance level of the robot. The R&D team estimates that the new robot may exhibit high, medium, and low performance levels with the probabilities of 0.35, 0.55, and 0.1 respectively. The annual savings corresponding to high, medium, and low performance levels are $500 000, $250 000, and $150 000 respectively. The development cost of the new robot is $550 000.

Use a five-year study period a MARR of 12% and a salvage value after 5 years of 50,000.

1)What is the present worth of the new robot for the high performance scenario?

2)What is the present worth of the new robot for the medium performance scenario?

3)What is the present worth of the new robot for the low performance scenario?

4)Using a decision tree and assuming that the present worths are $1,000,000, $300,000 and $20,000 for the high, medium and low performance scenarios respectively, what is the expected present worth?