Steve Gentry,the Operations Manager of Baja Fabricators,wants to Purchase a New

question 47

Essay

Steve Gentry,the operations manager of Baja Fabricators,wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard).However,because the price of crude oil is depressed,the market for such equipment is down.Steve believes that the market will improve in the near future and that the company should expand its capacity.The table below displays the three equipment options he is currently considering,and the profit he expects each one to yield over a two-year period.The consensus forecast at Baja is that there is about a 30% probability that the market will pick up "soon" (within 3 to 6 months)and a 70% probability that the improvement will come "later" (in 9 to 12 months,perhaps longer).
a.Calculate the expected monetary value of each decision alternative.
b.Which equipment option should Steve take?

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Definitions:

Vertical Analysis

Vertical analysis is a financial statement analysis technique where each entry in the main financial statements is represented as a proportion of a selected item, providing insights into the structure of the statements.

Net Income

The residual income of a company after all operational costs and taxes have been taken out of its revenue.

Comparative Financial Statement

Financial reports that present a company’s financial performance across different periods, allowing for comparison and analysis of trends.

Solvency

The ability of an entity to meet its long-term financial obligations and continue its operations into the foreseeable future.