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.

We will begin from where the manager has three choices here we see that the settlements for doing nothing is $110000, $160000 for subcontracting and $120000 for 2 machines purchased, right now gives the best result of $160000.

Presently on the off chance that we move back on choice tree where two machines are purchased and in the event that request is low, at that point result is 0.2 × 80000 + 0.8 × 160000 for appeal = 16000 + 128000 = $144000.

Presently on the off chance that choose to purchase just one machine, at that point the result are 0.2 × 100000 + 0.8 × 160000 (esteem for subcontracting)

= 20000 + 128000 = $148000

If there should arise an occurrence of occasion 1 we can see the advantages can be either $144000 or $148000 determined previously.

Se we see the best result is the point at which the supervisor subcontracts and the advantage is $160000.

Best choice is to purchase no machines and the normal result is $160000.