Problem 5.

22
Sales Revenue
0.6 100,000 x $550 = 55,000,000
EMV = 49,500,000
Proceed with production

Sales Revenue
75,000 x $550 = 41,250,000
0.4

Sales Revenue Cost

0.7 75,000 x $750 = 56,250,000 -100,000

Do study
EMV = 55,025,000 Sales Revenue Cost
70,000 x $750 = 52,500,000 -100,000
0.3

EMV (proceed with production) = 0.6 x 55,000,000 + 0.4 x 41,250,000 = 49,500,000

EMV(do study) = 0.7 x 56,150,000 + 0.3 x 52,400,000 = 55,025,000

Decision: The company should choose to do the study because it will result in higher EMV.
56,150,000

52,400,000
Problem 5.24

0.4 (Satisfactory)
Start up & production cost = $1,000,000

0.9 (Good) Start up and production cost = $1,000,000

EMV= 1,690,000 EMV = 2,150,000 Redesign cost = $1,000,000
Make Redesign Total = 2,000,000

Start up and production cost = $1,

0.1 (Not good) Redesign cost = $1,000,000
0.6 (Fail) Purchase cost = 1,000,000 units x
Vendor development cost = $1,00
Total costs =

Buy Start up and production cost = $1,000,000

Purchase cost = 1,000,000 units x $0.5/unit = $500,000
EMV = 2,500,000 Vendor development cost = $1,000,000
Total costs = 2,500,000

Purchase cost = 1,000,000 units x $0.5/unit = $500,000

Buy Vendor development cost = $1,000,000
EMV = 1,500,000 Total costs = $1,500,000

EMV (Redesign) = 0.9 x 2,000,000 + 0.1 x 3,500,000 = 2,150,000

EMV (Make) = 0.4 x 1,000,000 + 0.6 x 2,150,000 = 1,690,000

Decision: The company will choose to buy because it has lower EMV (cost)
tion cost = $1,000,000

nd production cost = $1,000,000

cost = $1,000,000
cost = 1,000,000 units x $0.5/unit = $500,000
evelopment cost = $1,000,000
3,500,000

5/unit = $500,000