5. Use an economic decision tree to find the probability distribution and the expected PW for an assembly line modification. The first cost is $80K, and its salvage value is $0. The firm's interest rate is 9%. The savings shown below depend on whether the assembly line runs one, two, or three shifts and on whether the product is made for 3 or 5 years. Savings per Useful Life Year Probability (years) Probability $15,000 .2 3 .6 30,000 .5 .4 45,000 .3

5. Use an economic decision tree to find the probability distribution and the expected PW for an assembly line modification. The first cost is $80K, and its salvage value is $0. The firm's interest rate is 9%. The savings shown below depend on whether the assembly line runs one, two, or three shifts and on whether the product is made for 3 or 5 years. Savings per Useful Life Year Probability (years) Probability $15,000 .2 3 .6 30,000 .5 .4 45,000 .3

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.

Question

Decisions Recognizing Risk

5. Use an economic decision tree to find the probability distribution and the expected PW for an
assembly line modification. The first cost is $80K, and its salvage value is $0. The firm's
interest rate is 9%. The savings shown below depend on whether the assembly line runs one,
two, or three shifts and on whether the product is made for 3 or 5 years.
Savings per
Year
Useful Life
Probability
(years)
Probability
$15,000
.2
3
.6
30,000
.5
.4
45,000
.3

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