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
Please see the attached file.
PV of year 'n' cash flow = Cash Flow / (1+ discount ...
The expert examines probability distribution and the expected PW. Savings and year probabilities for useful life is determined.