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EMV

6. The manager of an ice cream parlor located in a small resort town is trying to decide whether or not to purchase a new soft serve machine. The new equipment will cost $3,200 or $3.2k. The profitability of this investment will depend on whether the vacation season is booming or slow. There is a 15% probability the vacation season will be slow. The table below shows expected profits, in thousands, for the various vacation season and machine purchase combinations. These numbers do not factor in the cost of the new machine.

Slow Booming
New Machine 12 27
No New Machine 14 21

Show all of your work using excel spreadsheet

What decision should the manager make using EMV as her criteria?
The manager is not confident that the probability of a slow vacation season is 15%. At what probability level will she change the decision she made above, under EMV?

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1. The manager of an ice cream parlor located in a small resort town is trying to decide whether or not to purchase a new soft serve machine. The new equipment will cost $3,200 or $3.2k. The profitability of this investment will depend on whether the vacation season is booming or slow. There is a 15% probability the vacation season will be ...

Solution Summary

The solution calculates EMV (Expected Monetary Value) of purchasing a new machine and the probability at which the decision would be reversed.

$2.19