Acme Steel Fabricators experienced booming business forthe past five years. The company fabricates a wide range ofsteel products, such as railings, ladders, and light structuralsteel framing. The current manual method of materials han-dling is causing excessive inventories and congestion. Acmeis considering the purchase of an overhead rail-mountedhoist system or a forklift truck to increase capacity and im-prove manufacturing efficiency.The annual pretax payoff from the system depends on futuredemand. If demand stays at the current level, the probabilityof which is 0.50, annual savings from the overhead hoist willbe $10,000. If demand rises, the hoist will save $25,000 annu-ally because of operating efficiencies in addition to new sales.Finally, if demand falls, the hoist will result in an estimatedannual loss of $65,000. The probability is estimated to be 0.30for higher demand and 0.20 for lower demand.If the forklift is purchased, annual payoffs will be $5,000if demand is unchanged, $10,000 if demand rises, and-$25,000 if demand falls.a. Draw a decision tree for this problem and compute theexpected value of the payoff for each alternative.b. Which is the best alternative, based on the expectedvalues?
Acme Steel Fabricators experienced booming business for
the past five years. The company fabricates a wide range of
steel products, such as railings, ladders, and light structural
steel framing. The current manual method of materials han-
dling is causing excessive inventories and congestion. Acme
is considering the purchase of an overhead rail-mounted
hoist system or a forklift truck to increase capacity and im-
prove manufacturing efficiency.
The annual pretax payoff from the system depends on future
demand. If demand stays at the current level, the probability
of which is 0.50, annual savings from the overhead hoist will
be $10,000. If demand rises, the hoist will save $25,000 annu-
ally because of operating efficiencies in addition to new sales.
Finally, if demand falls, the hoist will result in an estimated
annual loss of $65,000. The probability is estimated to be 0.30
for higher demand and 0.20 for lower demand.If the forklift is purchased, annual payoffs will be $5,000
if demand is unchanged, $10,000 if demand rises, and
-$25,000 if demand falls.
a. Draw a decision tree for this problem and compute the
expected value of the payoff for each alternative.
b. Which is the best alternative, based on the expected
values?
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