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    Probability Distribution and the Rxpected PW

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    Problem 18.31 (Subject: Uncertainty & Probability)
    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/Year Probabilities Useful Life(Years) Probability
    $15,000 0.2 3 0.6
    $30,000 0.5 5 0.4
    $45,000 0.3

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    Formulas used

    PV of year 'n' cash flow = Cash Flow / (1+ discount ...

    Solution Summary

    The expert examines probability distribution and the expected PW. Savings and year probabilities for useful life is determined.

    $2.19