Respuesta :
Answer:
The EMV for option a is $4,971,200
The EMV for option b is: $6,101,600
Therefore, option B has the highest expected monetary value.
Explanation:
The EMV of the project is the Expected Money Value of the Project.
This value is given by the sum of each expected earning/cost multiplied by each probability.
So
(a) Proceeding immediately with production of a new top-of-of-the-line stereo TV that has just completed prototype testing.
The firm can expect sales to be 110,000 units at $520 each, with a probability of 0.68 and a 0.32 probability of 65,000 at $520. So:
[tex]EMV = 0.68*E_{1} + 0.32*E_{2}[/tex]
[tex]E_{1}[/tex] are the earnings of selling 110,000 units at $520 each. So:
[tex]E_{1} = 110,000*520 = 5,720,000[/tex]
[tex]E_{2}[/tex] are the earnings of selling 65,000 units at $520 each. So:
[tex]E_{1} = 110,000*520 = 3,380,000[/tex]
The EMV for option a is:
[tex]EMV = 0.68*E_{1} + 0.32*E_{2} = 0.68*5,720,000+0.32*3,380,000 = 4,971,200[/tex]
(b) Having the value analysis team complete a study
The firm expets sales of 90,000 units at $760, with a probability of 0.72 and a 0.28 probability of 60,000 units at $760. Value engineering, at a cost of $100,000, is only used in option b. So:
[tex]EMV = 0.72*E_{1} + 0.28*E_{2} - 100,000[/tex]
$100,000 is a cost, so it is subtracted.
[tex]E_{1}[/tex] are the earnings of selling 90,000 units at $760 each. So:
[tex]E_{1} = 90,000*760 = 6,840,000[/tex]
[tex]E_{2}[/tex] are the earnings of selling 60,000 units at $760 each. So:
[tex]E_{2} = 60,000*760 = 4,560,000[/tex]
The EMV for option b is:
[tex]EMV = 0.72*E_{1} + 0.28*E_{2} - 100,000 = 0.72*(6,840,000) + 0.28*( 4,560,000) - 100,000 = 6,101,600[/tex]
