Peachtree Company borrows $30,000 from the local bank at 7% interest. The term of the note is five years, and the annual payment
2 answers:
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Answer:
The best choice is process A since it has the highest EMV of $330000
Explanation:
there is a 50% chance that they will sell 50,000 units, and a 50% chance that they will sell 100,000 units
The decision tree is attached below, the calculations for the decision tree is given as:
The item sells for $10. Process A requires an investment of $120,000 for design and equipment, but results in a $4 per unit cost.
If there is high demand, they will sell 100,000 units, The profit = 100000($10-$4) - $120000 = $480000.
If there is low demand, they will sell 50,000 units, The profit = 50000($10-$4) - $120000 = $180000.
The EMV of process A = 0.5($480000) + 0.5($180000) = $330000
Process B requires only a $100,000 investment, but its per unit cost is $5
If there is high demand, they will sell 100,000 units, The profit = 100000($10-$5) - $100000 = $400000.
If there is low demand, they will sell 50,000 units, The profit = 50000($10-$5) - $100000 = $150000.
The EMV of process B = 0.5($400000) + 0.5($150000) = $275000
If the item is outsourced, there is virtually no cost other than the $6 per unit that they would pay their supplier
If there is high demand, they will sell 100,000 units, The profit = 100000($10-$6) = $400000.
If there is low demand, they will sell 50,000 units, The profit = 50000($10-$6) = $200000.
The EMV of Buying = 0.5($400000) + 0.5($200000) = $300000
The best choice is process A since it has the highest EMV
