A firm is considering employing one of the two machines A and B over a period of 4 years at the end of which the salvage value of each is zero. The cost of machine A is $10, 000 while that of machine B is $11, 000. The probability distributions of the returns for each machine are given in the table below.
PROBABILTY MACHINE A($) MACHINE B($)
0.25 6000 7000
0.50 5000 5000
0.25 4000 3000
The risk free discount rate is 10% while the risk premium applied as follows.
STANDARD DEVIATION($) RISK PREMIUM
0 – 999 0%
1000 – 1999 10%
2000 – 2999 10%
3000 – 3999 20%
Which of the two machines should be installed?
1
Expert's answer
2018-01-16T09:20:07-0500
Machine A($) = (0.25 * 6000 + 0.5 * 5000+ 0.25 * 4000)/1.1^4 = 3415.07 Machine B($) = (0.25 * 7000 + 0.5 * 5000 + 0.25 * 3000)/1.1^4 = 3415.07 We get same results for both Machines, that`s why we can be installed or first Machine A, or Machine B.
"assignmentexpert.com" is professional group of people in Math subjects! They did assignments in very high level of mathematical modelling in the best quality. Thanks a lot
Comments
Leave a comment