# Answer to Question #72502 in Finance for jones

Question #72502

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?

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?

Expert's answer

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.

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.

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