A firm has to decide whether to (1). stay with current machine as it is (2)....

A firm has to decide whether to (1). stay with current machine as it is (2). upgrade it with an enhancement or (3). buy a new machine. Cost of upgrade is $1000, and the cost of a new machine is $8000. Revenues are estimated as follows, based on the performance of the economy next year:

	stagnant economy	growth economy
no change	8000	8000
upgrade	8500	10000
new machine	8500	18000

It is estimated that the probability of a stagnant economy next year is 0.51 (so probability of a growth economy is 1 - 0.51).

If a new machine is purchased, and if there is a growth economy next year, what is the estimated payoff? (= revenue - cost of new machine)

Expert Solution

jeff jeffy answered 2 years ago

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