The manager is trying to decide whether to purchase one machine or two. If only 1 machine is bought and demand proves excessive, second machine can be bought later. Few sales would be lost, though, as lead time for delivery of this kind of machine is six months. Additionally, cost per machine will be lower of both machines are bought at same time. Probability of low demand is evaluated to be 0.3 and that of high demand to be 0.70. After-tax NPV of benefits from buying 2 machines together is $90,000 if demand is low and $170,000 if demand is high.
If one machine is bought and demand is low, NPV is $120,000. If demand is high, manager has 3 choices: (i) Do nothing, that has NPV of $120,000; (ii) Subcontract, that has NPV of $140,000; and (iii) purchase second machine, with NPV of $130,000. Sketch the decision tree for problem.