A manager must decide how many machines of a certain type to

Last updated: 1/9/2024

A manager must decide how many machines of a certain type to buy The machines will be used to manufacture a new gear for which there is increased demand The manager has narrowed the decision to two alternatives buy one machine or buy two If only one machine is purchased and demand is more than it can handle a second machine can be purchased at a later time However the cost per machine would be lower if the two machines were purchased at the same time The estimated probability of low demand is 30 and the estimated probability of high demand is 70 The net present value associated with the purchase of two machines initially is 75 000 if demand is low and 130 000 if demand is high The net present value for one machine and low demand is 90 000 If demand is high there are three options One option is to do nothing which would have a net present value of 90 000 A second option is to subcontract that would have a net present value of 110 000 The third option is to purchase a second machine This option would have a net present value of 100 000 How many machines should the manager purchase initially