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Machine 1 will initially cost $480,000, have a life of four years,scrap value of $60,000 and annual running costs if $72,000.
Machine 2 will initially cost $540,000, have a life of four years,scrap value of $120,000 and annual running costs if $47,000
It is now felt that final scrap value of machines depends on 2 factors, whether or not a new supplier enters the market
(which would reduce the likely scrap value) and the strength of the dollar against other currencies( since sales
of used machines will be made abroad and invoiced in foreign currency) . Adverse effects each will reduce the scrap value by 10% of the fig used in investment appraisal. Relevant probabilities are as followsNew supplier Probability Strong $ proba
Yes 0.4 yes 0.3
No 0.6 no 0.7What is now expected value of scrap proceeds from machine 2?
a)$106800
b)$109000
C)$111600
d)$113000Correct ans is C Sir please can you explain
If neither of the adverse effects happen, then the scrap will be 120,000 and the probability is 0.6 x 0.7 = 0.42
If both of the adverse effects happen then the scrap will be 120,000 – 24,000 = 96,000 and the probability is 0.4 x 0.3 = 0.12
If only one of the adverse effects happen, then the scrap will be 120,000 – 12,000 = 108,000 and the probability is 1 – 0.42 – 0.12 = 0.46.
Therefore the expected value is (120,000 x 0.42) + (96,000 x 0.12) + (108,000 x 0.46)
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