Question

A car parts manufacturing company is considering investing in the development of a new robot. The new robot is based on a new technology, so there is some uncertainty associated with its performance level. They estimated that the new robot may exhibit high, medium, and low performance levels with the probabilities of 0.35, 0.55, and 0.10 respectively. The annual savings corresponding to high, medium, and low performance levels are $500 000, $250 000, and $125 000 respectively. The development cost of the new robot is $550 000. The MARR is 10%

a. On the basis of a five-year study period, what is the present worth of the new robot for the high performance scenario?

b. On the basis of a five-year study period, what is the present worth of the new robot for the medium performance scenario?

c. On the basis of a five-year study period, what is the present worth of the new robot for the low performance scenario?

d. Using a decision tree and assuming that the present worths are $1,000,000, $300,000 and -$10,000 for the high, medium and low performance scenarios respectively, what is the expected present worth?

Answer 1

d. Expected Present Worth = Probability * Respective Present Worth

Expected Present Worth = 0.35 * 1000000 + 0.55 * 300000 + 0.10 * -10000

Expected Present Worth = $514000

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