Tiger Island Fabricators, Which Builds Offshore Oil Platforms, Has Been

question 24

Essay

Tiger Island Fabricators, which builds offshore oil platforms, has been experiencing problems with its profiling machine, a computer-driven device that cuts the ends of pipe so that it can be welded to another pipe, as shown in the data below.
Each time a machine breaks down, the company loses about $3,000. If the company implements preventive maintenance, it will be able to reduce the number of breakdowns to one per month. Preventive maintenance costs would be $500 a month. Is preventive maintenance a cost-effective option?

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Definitions:

Weak Form

A market efficiency hypothesis that suggests past prices and volumes have no effect on future prices, implying that past market data cannot be used to predict future market movements.

Efficient Market Hypothesis

A theory suggesting that at any given time, securities prices reflect all available information, meaning it's impossible to consistently achieve higher returns.

Superior Returns

Returns that exceed the performance of a benchmark index or the average returns of a particular investment category.

Neglected-firm Effect

A theory suggesting that lesser-known, smaller companies can provide higher returns than their larger counterparts due to lack of analyst coverage.