Demand for the product is expected to be 1000 units per month with moderate

# Demand for the product is expected to be 1000 units

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manufacturing plant has fixed costs of \$30,000 and variable costs of \$1 per unit. Demand for the product is expected to be 1,000 units per month with "moderate" market acceptance, but 2,000 under "strong" market acceptance. The probability of moderate acceptance is estimated to be 60 percent; strong acceptance has a probability of 40 percent. The product will sell for \$25 per unit regardless of the capacity decision. Which capacity choice should the firm make? The payoffs are as follows: small job shop, moderate acceptance = \$12,000; small job shop, strong acceptance = \$27,000; large job shop, moderate acceptance = \$10,000; large job shop, strong acceptance = \$32,000; repetitive manufacturing, moderate acceptance = -\$6,000; and repetitive manufacturing, strong acceptance = \$18,000. The expected value for the small job shop decision alternative is \$18,000. The expected value of the large job shop alternative is \$18,800. The expected value for the repetitive manufacturing alternative is \$3600. The firm should choose the large job shop capacity alternative. (Applying decision trees to capacity decisions, difficult) {AACSB: Analytic Skills} 78.A new machine tool is expected to generate receipts as follows: \$5,000 in year one; \$3,000 in year two, nothing in the next year, and \$2,000 in the fourth year. At an interest rate of 6%, what is the present value of these receipts? Is this a better present value than \$2,500 each year over four years? Explain. 79. Advantage Milling Devices is preparing to buy a new machine for precision milling of special metal alloys. This device can earn \$300 per hour, and can run 3,000 hours per year. The machine is expected to be this productive for four years. If the interest rate is 6%, what is the present value? What is the present value if the interest rate is not 6%, but 0%? Why does present value fall when interest rates rise? S = R * X = 300 * 3,000 * 3.465 = \$3,118,500; S = R * X = 300 * 3,000 * 3.240 = \$2,916,000 NPV falls because higher interest rates create a greater discount on future receipts. (Applying investment analysis to strategy-driven investments, moderate) {AACSB: Analytic Skills} 80. Suppose that the market has a 70% chance of being favorable and a 30% chance of being unfavorable. A favorable market will yield a profit of \$300,000, while an unfavorable market will yield a profit of \$20,000. What is the expected monetary value (EMV) in this situation? EMV = (0.7)(\$300,000) + (0.3)(\$20,000) = \$210,000 + \$6,000 = \$216,000. (Applying decision trees to capacity decisions, easy) {AACSB: Analytic Skills} 188 CHAPTER 8: LOCATION STRATEGIES TRUE/FALSE 1. FedEx chose Memphis, Tennessee, for its central location, or "hub," primarily because of the incentives offered by the city of Memphis and the state of Tennessee.

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