Answer to Question #132049 in Microeconomics for Simphiwe

Question

They are contemplating the acquisition of a machine at a cost of R234 000.
The probabilities of its life expectancy are as follows:
10 years 0.2
11 years 0.5
12 years 0.3
For a premium which will be payable in addition to the purchase price, the supplier of the
machine is prepared to guarantee that the machine will last at least 11 years.
The machine produces a single product with a selling price of R12 per unit and variable
cost of production of R7 per unit.
The probabilities of the following production volumes are:
5 000 units per annum 0.1
6 000 units per annum 0.3
7 000 units per annum 0.6
The present value of R1 per annum at the company’s screening rate for capital
projects is as follows:
10 years R6.71
11 years R7.13
12 years R7.52
Required:
a) Advise the management of Lota Ltd on whether they should acquire the machine. (14)
b) Calculate how much Lota Ltd can afford to pay by way of a premium in the first year
for a guarantee that the machine will last 11 years. (6)

Answer 1

Dear Simphiwe, your question requires a lot of work, which neither of our experts is ready to perform for free. We advise you to convert it to a fully qualified order and we will try to help you. Please click the link below to proceed: Submit order