Answer:
The EMV for option a is $4,971,200
The EMV for option b is: $6,101,600
Therefore, option B has the highest expected monetary value.
Explanation:
The EMV of the project is the Expected Money Value of the Project.
This value is given by the sum of each expected earning/cost multiplied by each probability.
So
(a) Proceeding immediately with production of a new top-of-of-the-line stereo TV that has just completed prototype testing.
The firm can expect sales to be 110,000 units at $520 each, with a probability of 0.68 and a 0.32 probability of 65,000 at $520. So:
![EMV = 0.68*E_{1} + 0.32*E_{2}](https://tex.z-dn.net/?f=EMV%20%3D%200.68%2AE_%7B1%7D%20%2B%200.32%2AE_%7B2%7D)
are the earnings of selling 110,000 units at $520 each. So:
![E_{1} = 110,000*520 = 5,720,000](https://tex.z-dn.net/?f=E_%7B1%7D%20%3D%20110%2C000%2A520%20%3D%205%2C720%2C000)
are the earnings of selling 65,000 units at $520 each. So:
![E_{1} = 110,000*520 = 3,380,000](https://tex.z-dn.net/?f=E_%7B1%7D%20%3D%20110%2C000%2A520%20%3D%203%2C380%2C000)
The EMV for option a is:
![EMV = 0.68*E_{1} + 0.32*E_{2} = 0.68*5,720,000+0.32*3,380,000 = 4,971,200](https://tex.z-dn.net/?f=EMV%20%3D%200.68%2AE_%7B1%7D%20%2B%200.32%2AE_%7B2%7D%20%3D%200.68%2A5%2C720%2C000%2B0.32%2A3%2C380%2C000%20%3D%204%2C971%2C200)
(b) Having the value analysis team complete a study
The firm expets sales of 90,000 units at $760, with a probability of 0.72 and a 0.28 probability of 60,000 units at $760. Value engineering, at a cost of $100,000, is only used in option b. So:
![EMV = 0.72*E_{1} + 0.28*E_{2} - 100,000](https://tex.z-dn.net/?f=EMV%20%3D%200.72%2AE_%7B1%7D%20%2B%200.28%2AE_%7B2%7D%20-%20100%2C000)
$100,000 is a cost, so it is subtracted.
are the earnings of selling 90,000 units at $760 each. So:
![E_{1} = 90,000*760 = 6,840,000](https://tex.z-dn.net/?f=E_%7B1%7D%20%3D%2090%2C000%2A760%20%3D%206%2C840%2C000)
are the earnings of selling 60,000 units at $760 each. So:
![E_{2} = 60,000*760 = 4,560,000](https://tex.z-dn.net/?f=E_%7B2%7D%20%3D%2060%2C000%2A760%20%3D%204%2C560%2C000)
The EMV for option b is:
![EMV = 0.72*E_{1} + 0.28*E_{2} - 100,000 = 0.72*(6,840,000) + 0.28*( 4,560,000) - 100,000 = 6,101,600](https://tex.z-dn.net/?f=EMV%20%3D%200.72%2AE_%7B1%7D%20%2B%200.28%2AE_%7B2%7D%20-%20100%2C000%20%3D%200.72%2A%286%2C840%2C000%29%20%2B%200.28%2A%28%204%2C560%2C000%29%20-%20100%2C000%20%3D%206%2C101%2C600)