Question

MacDonald​ Products, Inc., of​ Clarkson, New​ York, has the option of ​(a) proceeding immediately with production of a new​ top-of-the-line stereo TV that has just completed prototype testing or ​(b) having the value analysis team complete a study. If Ed​ Lusk, VP for​ operations, proceeds with the existing prototype​ (option a), the firm can expect sales to be 100 comma 000 units at ​$610 ​each, with a probability of 0.77 and a 0.23 probability of 70 comma 000 at ​$610. ​If, however, he uses the value analysis team​ (option b), the firm expects sales of 85 comma 000 units at ​$720​, with a probability of 0.74 and a 0.26 probability of 70 comma 000 units at ​$720. Value​ engineering, at a cost of ​$120 comma 000​, is only used in option b. Which option has the highest expected monetary value​ (EMV)? The EMV for option a is ​$ nothing and the EMV for option b is ​$ nothing. ​Therefore, option ▼ a b has the highest expected monetary value. ​(Enter your responses as integers​.)

Answer 1

The EMV for option a is ​$5,679,100

The EMV for option b is ​$5,719,200

Therefore, option b has the highest expected monetary value.

Step-by-step 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-the-line stereo TV that has just completed prototype testing.

There are these following probabilities:

77% probability of selling 100,000 units at $610 each.

23% probability of selling 70,000 units at $610 each.

So

`EMV = 0.77*E_(1) + 0.23*E_(2)`

`E_(1) = 100,000*610 = 6,100,000`

`E_(2) = 70,000*610 = 4,270,000`

`EMV = 0.77*E_(1) + 0.23*E_(2) = 0.77*(6,100,000) + 0.23*(4,270,000) = 5,679,100`

​(b) having the value analysis team complete a study.

There are these following probabilities:

74% probability of selling 85,000 units at $720.

26% probability of selling 70,000 units at $720.

The cost of value engineering, at 120,000. So this value is going to be dereased from the EMV.

`EMV = 0.74*E_(1) + 0.26*E_(2) - 120,000`

`E_(1) = 85,000*720 = 6,120,000`

`E_(2) = 70,000*720 = 5,040,000`

`EMV = 0.74*E_(1) + 0.26*E_(2) - 120,000 = 0.74*6,120,000 + 0.26*5,040,000 - 120,000 = 5,719,200`