A machine shop owner is attempting to decide whether to purchase a new drill press, a lathe, or a grinder. The return from each will be determined by whether the company succeeds in getting a government military contract. The profit or loss from each purchase and the probabilities associated with each contract outcome are shown in the following payoff table. Compute the expected value for each purchase and select the best one.
Contract No Contract
Purchase .40 .60
Drill press $40,000 $-8,000
Lathe 20,000 4,000
Grinder 12,000 10,000
Please show work for each purchase.
The solution discusses quantitative methods. The solution computes expected values for each purchase.