1 Mr. Hess of California Windows, Inc. is considering making a change in the material the firm uses for panes in its residential window line. The new material has a slight mirror attribute that assists in reflecting ultra-violet light and restricts the transmission of heat. The new material will raise the cost of a standard window by $3.76. This product is in the mature stage of the life cycle and with no modifications, Hess has estimated that sales of the window line will be 240,000 units per year for the next 5 years with a probability of 0.3, and has a 0.70 probability of selling 180,000 units per year over the four years. The standard price of a window unit is $45. With the new glass material, the price per unit can be increased to $50. However, Hess estimates that the demand for the newly designed window will be 210,000 units with a probability of 0.6, and that there will be a 0.4 probability of sales of 150,000 units. Which option will allow the company to maximize its expected monetary value (EMV)?
2 Michael's Engineering, Inc. manufactures components for the ever-changing notebook computer business. He is considering moving from a small custom design facility to an operation capable of much more rapid design of components. This means that Michael must consider upgrading his CAD equipment. Option 1 is to purchase two new desktop CAD systems at $100,000 each. Option 2 is to purchase an integrated system and the related server at $500,000. Michael's sales manager has estimated that if the market for notebook computers continues to expand, sales over the life of either system will be $1,000,000. He places the odds of this happening at 40%. He thinks the likelihood of the market having already peaked to be 60% and future sales to be only $700,000. What do you suggest Michael do and what is the EMV of this decision?