Whether to buy one new machine or two new machines

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Reference no: EM132106545

A company is trying to decide whether to buy one new machine or two new machines. If only one is purchased and demand turns out to be very high, the second machine can be purchased later. Some sales will be lost, because the order lead time is six months. In addition, the cost per machine will be lower if both machines are purchased at the same time. If the demand is low, the profit from purchasing one machine would be $260,000. If the demand is high, the manager has two options. Doing nothing has a profit of $260,000 and buying the second machine has a profit of $420,000 The profit from purchasing two machine together is $150,000 if demand is low and $600,000 demand is high. The probability of low demand is estimated to be 0.60 while the probability of high demand is estimated to be 0.40 What decision should the manager take? Show calculation and explanation.

Reference no: EM132106545

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