Engineering Management

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EEMT 5510 Homework #5

12-24. An improved design of a computerized piece of continuous quality measuring equipment used to control the thickness of rolled sheet products is being developed. It is estimated to sell for $125,000 more than the current design. Based on present test data, however, the typical user has the following probabilities of achieving different performance results and cost savings (relative to the current unit) in the first year of operation (assume these annual cost savings would escalate 5% per year thereafter; a five-year analysis period is used; the MARR=18%, and the net market value after five years is 0): |Performance Results |Probability |Cost Savings in Year One | |Optimistic |0.30 |$60,000 | |Most likely |0.55 |40,000 | |Pessimistic |0.15 |18,000 |

Based on the E(PW), is the new design preferable to the current unit? Based on a decision tree analysis, what is the EVPI? What does the EVPI tell you?

Without information, the optimal decision is to take the new design, shown by the decision tree below |scenarios |Year 0 cost |Year 1 Saving |Year2 Saving | | |Results (j) |p(j) |Decision |Outcome | | |Optimistic |0.30 |New |$79,063 | | |Most Likely |0.55 |New |11,042 | | |Pessimistic |0.15 |Current | 0 | | | |Expected Value: |$29,792...
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