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Decision Making

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 01

Decision Making Tools

Break-even analysis

Analysis to compare processes by finding the volume at which

two processes have equal total costs.

Preference matrix

Table that allows managers to rate alternatives based on several

performance criteria.

Decision theory

Approach when outcomes associated with alternatives are

in doubt.

Decision Tree

Model to compare alternatives and their possible

consequences.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 02

Break-even analysis notation

Variable cost (c)-

The portion of the total cost that varies directly with

volume of output.

Fixed cost (F)

The portion of the total cost that remains constant

regardless of changes in levels of output.

Quantity (Q)

The number of customers served or units produced per

year.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 03

Break-Even Analysis

By setting revenue equal to total cost

pQ = F + cQ

Q =

F

p - c

Total cost = F + cQ

Total revenue = pQ

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 04

Example A.1

A hospital is considering a new procedure to be offered at

$200 per patient. The fixed cost per year would be $100,000

with total variable costs of $100 per patient. What is the

break-even quantity for this service? Use both algebraic and

graphic approaches to get the answer.

The formula for the break-even quantity yields

Q =

F

p - c

= 1,000 patients =

100,000

200 100

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 05

Example A.1

The following table shows the results for Q = 0 and Q = 2,000

Quantity

(patients)

(Q)

Total Annual Cost ($)

(100,000 + 100Q)

Total Annual Revenue ($)

(200Q)

0 100,000 0

2,000 300,000 400,000

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 06

Example A.1

Total annual costs

Fixed costs

Break-even quantity

Profits

Loss

Patients (Q)

D

o

l

l

a

r

s

(

i

n

t

h

o

u

s

a

n

d

s

)

400

300

200

100

0

| | | |

500 1000 1500 2000

(2000, 300)

Total annual revenues

The two lines

intersect at

1,000

patients, the

break-even

quantity

(2000, 400)

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 07

Application A.1

The Denver Zoo must decide whether to move twin polar bears to Sea

World or build a special exhibit for them and the zoo. The expected

increase in attendance is 200,000 patrons. The data are:

Revenues per Patron for Exhibit

Gate receipts $4

Concessions $5

Licensed apparel $15

Estimated Fixed Costs

Exhibit construction $2,400,000

Salaries $220,000

Food $30,000

Estimated Variable Costs per Person

Concessions $2

Licensed apparel $9

Is the predicted

increase in

attendance

sufficient to

break even?

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A -08

Application A.1

Q TR = pQ TC = F + cQ

0 $0 $2,650,000

250,000 $6,000,000 $5,400,000

7

6

5

4

3

2

1

0

| | | | | |

50 100 150 200 250

C

o

s

t

a

n

d

r

e

v

e

n

u

e

(

m

i

l

l

i

o

n

s

o

f

d

o

l

l

a

r

s

)

Q (thousands of patrons)

Where

p = 4 + 5 + 15 = $24

F = 2,400,000 + 220,000 + 30,000

= $2,650,000

c = 2 + 9 = $11

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 09

Application A.1

Q

TR = pQ

TC = F + cQ

0 $0 $2,650,000

250,000 $6,000,000 $5,400,000

Where

p = 4 + 5 + 15 = $24

F = 2,400,000 + 220,000 + 30,000

= $2,650,000

c = 2 + 9 = $11

Algebraic solution of Denver Zoo problem

pQ = F + cQ

24Q = 2,650,000 + 11Q

13Q = 2,650,000

Q = 203,846

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 10

Example A.2

If the most pessimistic sales forecast for the proposed

service from Example 1 was 1,500 patients, what would be

the procedures total contribution to profit and overhead per

year?

200(1,500) [100,000 + 100(1,500)] pQ (F + cQ) =

= $50,000

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 11

Make-or-buy decision notation

F

b

The fixed cost (per year) of the buy option

F

m

The fixed cost of the make option

c

b

The variable cost (per unit) of the buy option

c

m

The variable cost of the make option

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 12

Make-or-buy decision

Total cost to buy

F

b

+ c

b

Q

Total cost to make

F

m

+ c

m

Q

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 13

F

b

+ c

b

Q = F

m

+ c

m

Q

Q =

F

m

F

b

c

b

c

m

Example A.3

A fast-food restaurant featuring hamburgers is adding

salads to the menu

The price to the customer will be the same

Fixed costs are estimated at $12,000 and variable costs

totaling $1.50 per salad

Preassembled salads could be purchased from a local

supplier at $2.00 per salad

Preassembled salads would require additional

refrigeration with an annual fixed cost of $2,400

Expected demand is 25,000 salads per year

What is the break-even quantity?

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 14

The formula for the break-even quantity yields the

following:

Q =

F

m

F

b

c

b

c

m

= 19,200 salads =

12,000 2,400

2.0 1.5

Example A.3

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 15

Application A.2

At what volume should the Denver Zoo be

indifferent between buying special sweatshirts from

a supplier or have zoo employees make them?

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 16

Buy Make

Fixed costs $0 $300,000

Variable costs $9 $7

Q =

F

m

F

b

c

b

c

m

Q =

300,000 0

9 7

Q = 150,000

Preference Matrix

A Preference Matrix is a table that allows you to

rate an alternative according to several

performance criteria.

The criteria can be scored on any scale as long as the same

scale is applied to all the alternatives being compared.

Each score is weighted according to its perceived

importance, with the total weights typically

equaling 100.

The total score is the sum of the weighted scores (weight

score) for all the criteria and compared against scores for

alternatives.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 17

The following table shows the performance criteria, weights,

and scores (1 = worst, 10 = best) for a new thermal storage air

conditioner. If management wants to introduce just one new

product and the highest total score of any of the other product

ideas is 800, should the firm pursue making the air conditioner?

Example A.4

Performance Criterion Weight (A) Score (B) Weighted Score (A B)

Market potential

30 8 240

Unit profit margin

20 10 200

Operations compatibility

20 6 120

Competitive advantage

15 10 150

Investment requirements

10 2 20

Project risk

5 4 20

Weighted score = 750

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 18

Because the sum of the weighted scores is 750, it falls short

of the score of 800 for another product. This result is

confirmed by the output from OM Explorers Preference

Matrix Solver below

Example A.4

Total 750

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 19

Application A.3

The following table shows the performance criteria, weights, and

scores (1 = worst, 10 = best) for a new thermal storage air

conditioner. If management wants to introduce just one new

product and the highest total score of any of the other product

ideas is 800, should the firm pursue making the air conditioner?

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 20

Performance Criterion Weight (A) Score (B) Weighted Score (A B)

Market potential 10 5 50

Unit profit margin 30 8 240

Operations compatibility 20 10 200

Competitive advantage 25 7 175

Investment

requirements

10 3 30

Project risk 5 4 20

Weighted score = 715

No.

Because

715 >800

Decision Theory Steps

List a reasonable number of feasible alternatives

List the events (states of nature)

Calculate the payoff table showing the payoff for

each alternative in each event

Estimate the probability of occurrence for each

event

Select the decision rule to evaluate the alternatives

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 21

Example A.5

A manager is deciding whether to build a small or a large

facility

Much depends on the future demand

Demand may be small or large

Payoffs for each alternative are known with certainty

What is the best choice if future demand will be low?

Possible Future Demand

Alternative Low High

Small facility 200 270

Large facility 160 800

Do nothing 0 0

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 22

Example A.5

The best choice is the one with the highest payoff

For low future demand, the company should build a small

facility and enjoy a payoff of $200,000

Under these conditions, the larger facility has a payoff of

only $160,000

Possible Future Demand

Alternative Low High

Small facility 200 270

Large facility 160 800

Do nothing 0 0

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 23

Decision Making under Uncertainty

Maximin

Maximax

Laplace

Minimax Regret

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 24

Example A.6

Reconsider the payoff matrix in Example 5. What is the best

alternative for each decision rule?

a. Maximin. An alternatives worst payoff is the lowest

number in its row of the payoff matrix, because the

payoffs are profits. The worst payoffs ($000) are

Alternative Worst Payoff

Small facility 200

Large facility 160

The best of these worst numbers is $200,000, so the

pessimist would build a small facility.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 25

Example A.6

b. Maximax. An alternatives best payoff ($000) is the

highest number in its row of the payoff matrix, or

Alternative Best Payoff

Small facility 270

Large facility 800

The best of these best numbers is $800,000, so the

optimist would build a large facility.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 26

Example A.6

c. Laplace. With two events, we assign each a probability

of 0.5. Thus, the weighted payoffs ($000) are

The best of these weighted payoffs is $480,000, so

the realist would build a large facility.

0.5(200) + 0.5(270) = 235

0.5(160) + 0.5(800) = 480

Alternative Weighted Payoff

Small facility

Large facility

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 27

Example A.6

d. Minimax Regret. If demand turns out to be low, the best

alternative is a small facility and its regret is 0 (or 200

200). If a large facility is built when demand turns out to

be low, the regret is 40 (or 200 160).

Regret

Alternative Low Demand High Demand

Maximum

Regret

Small facility 200 200 = 0 800 270 =530 530

Large facility 200 160 = 40 800 800 = 0 40

The column on the right shows the worst regret for each

alternative. To minimize the maximum regret, pick a

large facility. The biggest regret is associated with having

only a small facility and high demand.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 28

Application A.4

Fletcher (a realist), Cooper (a pessimist), and Wainwright (an

optimist) are joint owners in a company. They must decide

whether to make Arrows, Barrels, or Wagons. The government

is about to issue a policy and recommendation on pioneer

travel that depends on whether certain treaties are obtained.

The policy is expected to affect demand for the products;

however it is impossible at this time to assess the probability

of these policy events. The following data are available:

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 29

Payoffs (Profits)

Alternative

Land Routes

No treaty

Land Routes

Treaty

Sea Routes

Only

Arrows $840,000 $440,000 $190,000

Barrels $370,000 $220,000 $670,000

Wagons $25,000 $1,150,000 ($25,000)

Application A.4

Which product would be favored by Fletcher (realist)?

Fletcher (realist Laplace) would choose arrows

Which product would be favored by Cooper (pessimist)?

Cooper (pessimist Maximin) would choose barrels

Which product would be favored by Wainwright (optimist)?

Wainwright (optimist Maximax) would choose wagons

What is the minimax regret solution?

The Minimax Regret solution is arrows

A - 30 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Decision Making Under Risk

Use the expected value rule

Weigh each payoff with associated probability

and add the weighted payoff scores.

Choose the alternative with the best expected

value.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 31

Example A.7

Reconsider the payoff matrix in Example 5. For the expected

value decision rule, which is the best alternative if the

probability of small demand is estimated to be 0.4 and the

probability of large demand is estimated to be 0.6?

The expected value for each

alternative is as follows:

Possible Future

Demand

Alternative Small Large

Small facility 200 270

Large facility 160 800

0.4(200) + 0.6(270) = 242

0.4(160) + 0.6(800) = 544

Alternative Expected Value

Small facility

Large facility

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 32

The large

facility is

the best

alternative.

For Fletcher, Cooper, and Wainwright, find the best decision

using the expected value rule. The probabilities for the events

are given below.

What alternative has the best expected results?

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 33

Alternative

Land routes,

No Treaty

(0.50)

Land Routes,

Treaty Only

(0.30)

Sea routes,

Only (0.20)

Arrows 840,000 440,000 190,000

Barrels 370,000 220,000 670,000

Wagons 25,000 1,150,000 -25,000

Application A.5

Application A.5

A - 34

Alternative

Land routes, No

Treaty

(0.50)

Land Routes,

Treaty Only

(0.30)

Sea routes

Only (0.20)

Expected Value

Arrows (.50) * 840,000` + (.30)* 440,000 + (.20) * 190,000 590,000

Barrels (.50) * 370,000` + (.30)* 220,000 + (.20) * 670,000 385,000

Wagons (.50) * 25,000` + (.30)* 1,150,000 + (.20) * -25,000 352,500

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Arrows is the

best alternative.

Payoff 1

Payoff 2

Payoff 3

Alternative 3

Alternative 4

Alternative 5

Payoff 1

Payoff 2

Payoff 3

E

1

& Probability

E

2

& Probability

E

3

& Probability

E

2

& Probability

E

3

& Probability

Payoff 1

Payoff 2

1st

decision

1

Possible

2nd decision

2

Decision Trees

= Event node

= Decision node

E

i

= Event i

P(E

i

) = Probability of event i

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 35

Example A.8

A retailer will build a small or a large facility at a new location

Demand can be either small or large, with probabilities

estimated to be 0.4 and 0.6, respectively

For a small facility and high demand, not expanding will have a

payoff of $223,000 and a payoff of $270,000 with expansion

For a small facility and low demand the payoff is $200,000

For a large facility and low demand, doing nothing has a payoff

of $40,000

The response to advertising may be either modest or sizable,

with their probabilities estimated to be 0.3 and 0.7, respectively

For a modest response the payoff is $20,000 and $220,000 if the

response is sizable

For a large facility and high demand the payoff is $800,000

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 36

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

A - 37 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

0.3 x $20 = $6

0.7 x $220 = $154

$6 + $154 = $160

A - 38 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

$160

$160

A - 39 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

$160

$160

$270

A - 40 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

$160

$160

$270

x 0.4 = $80

x 0.6 = $162

$80 + $162 = $242

A - 41 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

$160

$160

$270

$242

x 0.6 = $480

0.4 x $160 = $64

$544

A - 42 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Example A.8

$200

$223

$270

$40

$800

$20

$220

Dont expand

Expand

Low demand [0.4]

2

High demand [0.6]

3

Do nothing

Advertise

Modest response [0.3]

Sizable response [0.7]

1

$160

$160

$270

$242

$544

$544

A - 43 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Application A.6

a. Draw the decision tree for the Fletcher, Cooper, and

Wainwright Application 5

b. What is the expected payoff for the best alternative

in the decision tree below?

Alternative

Land routes,

No Treaty

(0.50)

Land Routes,

Treaty Only

(0.30)

Sea routes, Only

(0.20)

Arrows 840,000 440,000 190,000

Barrels 370,000 220,000 670,000

Wagons 25,000 1,150,000 -25,000

A - 44 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Application A.6

A - 45 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Solved Problem 1

A small manufacturing business has patented a new

device for washing dishes and cleaning dirty kitchen sinks

The owner wants reasonable assurance of success

Variable costs are estimated at $7 per unit produced and

sold

Fixed costs are about $56,000 per year

a. If the selling price is set at $25, how many units must be

produced and sold to break even? Use both algebraic and

graphic approaches.

b. Forecasted sales for the first year are 10,000 units if the

price is reduced to $15. With this pricing strategy, what

would be the products total contribution to profits in the

first year?

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 46

Solved Problem 1

a. Beginning with the algebraic approach, we get

Q =

F

p c

= 3,111 units

=

56,000

25 7

Using the graphic approach, shown in Figure A.6, we first draw

two lines:

The two lines intersect at Q = 3,111 units, the break-even

quantity

Total revenue =

Total cost =

25Q

56,000 + 7Q

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 47

Total costs

Break-even

quantity

250

200

150

100

50

0

Units (in thousands)

D

o

l

l

a

r

s

(

i

n

t

h

o

u

s

a

n

d

s

)

| | | | | | | |

1 2 3 4 5 6 7 8

Total revenues

3.1

$77.7

Solved Problem 1

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 48

Solved Problem 1

b. Total profit contribution = Total revenue Total cost

= pQ (F + cQ)

= 15(10,000) [56,000 + 7(10,000)]

= $24,000

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 49

Solved Problem 2

Herron Company is screening three new product idea: A, B, and C.

Resource constraints allow only one of them to be commercialized. The

performance criteria and ratings, on a scale of 1 (worst) to 10 (best),

are shown in the following table. The Herron managers give equal

weights to the performance criteria. Which is the best alternative, as

indicated by the preference matrix method?

Rating

Performance Criteria Product A Product B Product C

1. Demand uncertainty and project risk 3 9 2

2. Similarity to present products 7 8 6

3. Expected return on investment (ROI) 10 4 8

4. Compatibility with current

manufacturing process

4 7 6

5. Competitive Strategy 4 6 5

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 50

Solved Problem 2

Each of the five criteria receives a weight of

1/5 or 0.20

The best choice is product B as Products A and C are well behind in

terms of total weighted score

(0.20 3) + (0.20 7) + (0.20 10) +

(0.20 4) + (0.20 4)

= 5.6

(0.20 9) + (0.20 8) + (0.20 4) +

(0.20 7) + (0.20 6)

= 6.8

(0.20 2) + (0.20 6) + (0.20 8) +

(0.20 6) + (0.20 5)

= 5.4

Product Calculation Total Score

A

B

C

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 51

Solved Problem 3

Adele Weiss manages the campus flower shop. Flowers must

be ordered three days in advance from her supplier in Mexico.

Although Valentines Day is fast approaching, sales are almost

entirely last-minute, impulse purchases. Advance sales are so

small that Weiss has no way to estimate the probability of low

(25 dozen), medium (60 dozen), or high (130 dozen) demand for

red roses on the big day. She buys roses for $15 per dozen and

sells them for $40 per dozen. Construct a payoff table. Which

decision is indicated by each of the following decision criteria?

a. Maximin

b. Maximax

c. Laplace

d. Minimax regret

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 52

Solved Problem 3

The payoff table for this problem is

Demand for Red Roses

Alternative

Low

(25 dozen)

Medium

(60 dozen)

High

(130 dozen)

Order 25 dozen $625 $625 $625

Order 60 dozen $100 $1,500 $1,500

Order 130 dozen ($950) $450 $3,250

Do nothing $0 $0 $0

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 53

Solved Problem 3

a. Under the Maximin criteria, Weiss should order 25 dozen, because

if demand is low, Weisss profits are $625, the best of the worst

payoffs.

b. Under the Maximax criteria, Weiss should order 130 dozen. The

greatest possible payoff, $3,250, is associated with the largest

order.

c. Under the Laplace criteria, Weiss should order 60 dozen. Equally

weighted payoffs for ordering 25, 60, and 130 dozen are about

$625, $1,033, and $917, respectively.

d. Under the Minimax regret criteria, Weiss should order 130 dozen.

The maximum regret of ordering 25 dozen occurs if demand is

high: $3,250 $625 = $2,625. The maximum regret of ordering 60

dozen occurs if demand is high: $3,250 $1,500 = $1,750. The

maximum regret of ordering 130 dozen occurs if demand is low:

$625 ($950) = $1,575.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

A - 54

Solved Problem 4

White Valley Ski Resort is planning the ski lift operation for its

new ski resort and wants to determine if one or two lifts will

be necessary. Each lift can accommodate 250 people per day

and skiing occurs 7 days per week in the 14-week season and

lift tickets cost $20 per customer per day. The table below

shows all the costs and probabilities for each alternative and

condition. Should the resort purchase one lift or two?

Alternatives Conditions Utilization Installation Operation

One lift Bad times (0.3) 0.9 $50,000 $200,000

Normal times (0.5) 1.0 $50,000 $200,000

Good times (0.2) 1.0 $50,000 $200,000

Two lifts Bad times (0.3) 0.9 $90,000 $200,000

Normal times (0.5) 1.5 $90,000 $400,000

Good times (0.2) 1.9 $90,000 $400,000

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 55

Solved Problem 4

The decision tree is shown on the following slide. The payoff

($000) for each alternative-event branch is shown in the

following table. The total revenues from one lift operating at

100 percent capacity are $490,000 (or 250 customers 98 days

$20/customer-day).

0.9(490) (50 + 200) = 191

1.0(490) (50 + 200) = 240

1.0(490) (50 + 200) = 240

0.9(490) (90 + 200) = 151

1.5(490) (90 + 400) = 245

1.9(490) (90 + 400) = 441

Alternatives Economic Conditions Payoff Calculation (Revenue Cost)

One lift Bad times

Normal times

Good times

Two lifts Bad times

Normal times

Good times

A - 56 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Bad times [0.3]

Normal times [0.5]

Good times [0.2]

$191

$240

$240

Bad times [0.3]

Normal times [0.5]

Good times [0.2]

$151

$245

$441

One lift

Two lifts

$256.0

$225.3

$256.0

Solved Problem 4

0.3(191) + 0.5(240) +

0.2(240) = 225.3

0.3(151) + 0.5(245) +

0.2(441) = 256.0

A - 57 Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall A - 58

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any

means, electronic, mechanical, photocopying, recording, or

otherwise, without the prior written permission of the publisher.

Printed in the United States of America.

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