How many machines should the company buy initially

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Reference no: EM132215998

A manager is trying to decide whether to buy one machine or two. If only one machine is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales would be lost, however, because the lead time for delivery of this type of machine is six months. In addition, the cost per machine will be lower if both machines are purchased at the same time. The probability of low demand is estimated to be 0.20 The after-tax NPV of the benefits from purchasing two machines together is $90,000 if demand is low and $180,000 if demand is high. If one machine is purchased and demand is low, the NPV is $120,000. If demand is high, the manager has three options: (1) doing nothing, which has an NPV of $120,000 ; (2) subcontracting, with an NPV of $160,000 ; and (3) buying the second machine, with an NPV of $140,000 a. draw a decision tree b. how many machines should the company buy initially? what is expected payoff for this alternative ?

Reference no: EM132215998

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