Steve Gentry, the Operations Manager of Baja Fabricators, Wants to Purchase

question 28

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).
Profit from Capacity Investment (in Dollars)
$$\begin{array} { | l | c | c | } \hline \begin{array} { l } \text { Equipment Option }\end{array} & \begin{array} { c } \text { Market picks up } \\\text { "soon" } p = 0.30\end{array} & \begin{array} { c } \text { Market picks up } \\\text { "later" } p = 0.70\end{array} \\\hline \text { Manual Machine } & - 120000 & 210000 \\\hline \text { NC Machine } & 140000 & 160000 \\\hline \text { CNC Machine } & 200000 & - 200000 \\\hline\end{array}$$ a. Calculate the expected monetary value of each decision alternative.
b. Which equipment option should Steve take?

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Definitions:

Attractiveness

A quality that makes a person, place, thing, or idea appealing to the senses, mind, or emotions, often leading to positive regard or interest.

Halo Effect

A type of cognitive bias where the perception of one positive quality in a person or thing leads to the attribution of other positive qualities, often unrelated.

Aggressive Behaviours

Actions intended to harm or intimidate others, expressed physically or verbally.

Artificial Setting

An environment created or controlled by researchers to simulate conditions for experiments, which might not accurately reflect natural conditions.