Question

In: Statistics and Probability

A machine shop owner is attempting to decide whether to purchase a new drill press, a...

A machine shop owner is attempting to decide whether to purchase a new drill press, a lathe, or a grinder.  The profit or loss from each purchase are shown in the following table where one of two states of nature could occur (the company succeeds in getting a military contract, or it does not get a contract).

 
Contract status
 
Purchase
Get Contract
No contract
Drill press
40000
-8000
Lathe
25000
4000
Grinder
12000
10,000

 

a-for each purchase decision show the numbers you use when using an optimistic method of choosing which one item to purchase and indicate which item is purchased by this method.

b-for each purchase decision show the numbers you use when using a conservative method of choosing which one item to purchase and indicate which item is purchased by this method.

c-show the numbers you use in a new table using the minimax regret method of choosing which one item to purchase and indicate which item is purchased by this method.

d-What is the expected monetary value of each purchase option when the probability of getting contract is .4 and which is the best option under this probability?

e-Since .4 may be incorrect as the probability of getting a military contract, over what range of values for the probability of getting a contract would each purchase option be the most favored? Show your work!

Solutions

Expert Solution

Under the maximax criteria, the best decision for the machine shop owner is to purchase a new drill press as it has the highest payoff. The payoff is $40,000

Under the maxmin criteria, the best decision for the machine shop owner is to purchase a new grinder press as it has the highest payoff. The Payoff = $6,000

According to minimax regret, we compute total regrets for each alternative and select the one with the smallest total regret. In this case, the machine shop owner chooses to buy grinder.Payoff = $26,000

Hurwicz’s criterion = α(maximum payoff for an alternative) + (1-α)(minimum payoff for an alternative)

The option that should be selected according to Hurwicz decision maker when α = 0.4 is that shop owner should purchase drill. The payoff is $13,600

orchestra answered 1 year ago
Next > < Previous

Related Solutions

A machine shop owner is attempting to decide whether to purchase a new drill press, a...
A machine shop owner is attempting to decide whether to purchase a new drill press, a lathe, or a grinder. The profit or loss from each purchase are shown in the following table where one of two states of nature could occur (the company succeeds in getting a military contract, or it does not get a contract). Contract status Purchase             Get Contract      No contract Drill press            30,000                       -10,000 Lathe                     25,000                        4,000 Grinder                 12,000                    ...
A machine shop owner wants to decide whether to purchase a new drill press, new lathe,...
A machine shop owner wants to decide whether to purchase a new drill press, new lathe, or new grinder. As shown in the following table, the profit from each purchase will vary depending on whether or not the owner wins a government contract, with the owner estimating a probability of .60 of winning the contract: Profit if win contract Profit if lose contract drill press       $40,000 $-8,000 lathe       $20,000 $ 4,000 grinder       $12,000 $10,000 Before deciding which...
Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less...
Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $250,000. If it is purchased, Dungan will incur costs of $7,000 to remove the present equipment and revamp its facilities. This $7,000 is tax deductible at time 0. Depreciation for tax purposes will be allowed as follows: year 1, $60,000; year 2, $90,000; and in...
Exercise 17.4 Alliance Manufacturing Company is considering the purchase of a new automated drill press to...
Exercise 17.4 Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per...
A machine shop is trying to decide which of two types of metal lathe to purchase....
A machine shop is trying to decide which of two types of metal lathe to purchase. The more versatile Japanese lathe costs $32,000,and will generate an annual profit of$16,000 for three years. Its trade-in value after three years will be about $10,000. The more durable German lathe costs $42,000, and will increase profits by $12,000 per year for six years. Its trade-in value at that point is estimated at $15,000. Based on an NPV calculation at a 10% cost of...
Problems Allred Inc. is trying to decide whether to purchase Machine A or Machine B. Below...
Problems Allred Inc. is trying to decide whether to purchase Machine A or Machine B. Below are the associated costs. Which are relevant? Machine A Machine B Relevant or Not Relevant? Cost of Machine $46,000 $50,000 Setup Costs $5,000 $5,000 Costs incurred for research of the machine $400 $600 Annual operating costs for the machine $6,000 $5,000 Outsourcing Decision Animals United currently outsources pet beds for their product line.The beds are purchased for $30 each.The company is considering making the...
A tool and die company is considering the purchase of a drill press with fuzzy-logic software...
A tool and die company is considering the purchase of a drill press with fuzzy-logic software to improve accuracy and reduce tool wear. The company has the opportunity to buy a slightly used machine for $15,000 or new one for $21,000. Because the new machine is a more sophisticated model, its operating cost is expected to be $7000 per year, while the used machine is expected to require $8200 per year. Each machine is expected to have 25 years life...
58. Kroft Food Products is attempting to decide whether it should introduce a new line of...
58. Kroft Food Products is attempting to decide whether it should introduce a new line of salad dressings called Special Choices. The company can test market the salad dressings in selected geographic areas or bypass the test market and introduce the product nationally. The cost of the test market is $150,000. If the company conducts the test market, it must wait to see the results before deciding whether to introduce the salad dressings nationally. The probability of a positive test...
We are trying to decide whether to replace the original machine with a new machine. Original...
We are trying to decide whether to replace the original machine with a new machine. Original Machine: Initial cost = 1,000,000; Annual depreciation = 180,000; Purchased 2 years ago; Book Value = 640,000; Salvage today = 700,000; Salvage in 3 years = 150,000 New Machine: Initial cost = 600,000; 3-year life, straight-line depreciation; Salvage in 3 years = 100,000; Cost savings = 50,000/year Required return = 10% and Tax rate = 40% a. Should we replace the original machine with...
The senior executives of an oil company are trying to decide whether to drill for oil...
The senior executives of an oil company are trying to decide whether to drill for oil in a particular field in the Gulf of Mexico. It costs the company $300,000 to drill in the selected field. Company executives believe that if oil is found in this field its estimated value will be $1,800,000. At present, this oil company believes that there is a 48% chance that the selected field actually contains oil. Before drilling, the company can hire a geologist...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT