A manager is trying to decide whether to buy one machine or two. If only one is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales will be lost, however, because the lead time for producing this type of machine is six months. In addition, the cost per machine will be lower if both are purchased at the same time.
The probability of low demand is estimated to be 0.20. Theafter-tax net present value of the benefits from purchasing the two machines together is $80,000 if demand is low and $160,000 if demand is high. If one machine is purchased and demand is low, the net present value is Xc. Low demand 100 Do nothing110 Low demand 100 Do nothing 0.20 110 160 120 Buy 2 machin Buy 1 machineHigh demand Subcontract 0.20 High demand 0.80 Low demand 0.20 Subcontract 0 80 Low demand80 machines 0.20 High demand 160 Buy 2 Buy 1 120 Buy 2 machines 80 machine Buy 1 machine 160 High demand 160 0 80 0.80 b. How many machines should the company buy initially? What is the expected payoff for this alternative? Best decision is to buy machine(s) and its expected payoff is S(Enter your responses as integers.)$100,000. If demand is high, the manager has three options. Doing nothing has a net present value of $110,000; subcontracting, $160,000; and buying the second machine, $120,000.