Question

A-Z Technologies, a manufacturer of amplified pressure transducers, is trying to decide between a dual-speed and a variable-speed machine. The engineers are not sure about the salvage value of the variable-speed machine, so they have asked several different used-equipment dealers for estimates. The results can be summarized as follows: there is a 35% chance of getting $21,500; a 41% chance of getting $22,000; and a 13% chance of getting $36,000. Also, there is an 11% chance that the company may have to pay $7,000 to dispose of the equipment. Calculate the expected salvage value.

Answer 1

Answer:

Expected salvage value = $20455

Explanation:

The expected salvage value of the machine can be calculated by multiplying the expected salvage values by their relative probabilities and then summing up the resulting values. The following formula can be used,

Expected salvage value = pA * svA  +  pB * svB  +  ...  +  pN * svN

Where,

• p represents the probability of each scenario
• sv represents the salvage value under each scenario
• A, B, ... , N represents scenario A, B, ... , till Nth number of scenario

Expected salvage value = 0.35 * 21500  +  0.41 * 22000  +  0.13 * 36000  +  

0.11 * -7000

Expected salvage value = $20455