1. Your company is about to release a new product. They are unsure of what to ex
ID: 3322769 • Letter: 1
Question
1. Your company is about to release a new product. They are unsure of what to expect for Sales or Annual Costs. They believe one of 3 possible Annual Sales figures will occur, at the following probabilities. Furthermore, they believe their Annual Costs to support the produce are likely to be low, but, given that the product is utilizing a new manufacturing process, it is possible that process will be unreliable and costs to support it will be much higher than expected: Annual Sales P Annual Costs P $45,000 0.25 $7,000 0.9 $25,000 0.6 $20,000 0.1 $10,000 0.15 a) What is the expected value for Annual Sales and for Annual Costs? b) Using those values, what is the expected AEW (Annual Equivalent Worth) of this product? c) What are the joint probabilities of the 6 possible scenarios? d) What is the AEW of each scenario? e) Calculate the AEW using parts (c) and (d). Is your answer consistent with part (b)? Why or why not? f) What is the probability that the product will have a negative AEW? g) Suppose the company decides that, if the Annual Costs exceed $15,000, they will stop production after the first year. However, if annual costs are below $15,000, they will continue producing the product for 5 years. a. How can you model this? b. What is the new expected AEW?
Annual Sales Annual Costs S45.000 0.25 $25,000 S10,000 0.15 $7,000 0.9 0.6 $20,000 0.1Explanation / Answer
g) we will evaluate the probabilities based on expected annual cost as 15,000
probability of cost being 20000 as x
and probability of cost being 7000 as 1-x
x*20,000+(1-x)*7000 = 15000
x=8/13
Thus if the probability of x gets greater than 8/13 we stop the production
Expected annual sales = 0.25*45K + 0.6*25K+0.15*10K = 27,500
Expected AEW = Expected annual sales - Expected annual cost
= 27,500- 15000 = $12,500
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.