Management at the Doctors Bone and Joint Clinic is considering whether to purchase a newly developed MRI

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Question:

Management at the Doctors Bone and Joint Clinic is considering whether to purchase a newly developed MRI machine which they feel will provide the basis for better diagnoses of foot and knee problems. The new machine is quite expensive and will be used for a number of years. The clinic's CFO asked an analyst to work up estimates of the NPV of the investment under three different assumptions about the level of demand for its use (high, medium, and low). The CFO assigned a 50 percent probability to the medium-demand state, a 30 percent probability to the high state, and the remaining 20 percent to the low state. After making forecasts of the demand for the machine based on the CFO's judgment and past utilization rates for MRI scans, the following NPV estimates were made:

a. What is the expected NPV for the MRI machine based on the above estimates? How would you interpret the meaning of the expected NPV? Does this look like a good investment to you?

b. Assuming that the probability of the medium-demand state remains 50 percent, calculate the maximum probability you can assign to the low-demand state and still have an expected NPV of 0 or higher. (The sum of the probabilities assigned to all three states must be 100 percent.)

a. The expected NPV for the MRI machine is SE. (Round to the nearest dollar.)

How would you interpret the meaning of the expected NPV? Does this look like a good investment to you? (Select the best choice below.)

OA The expected NPV is the weighted-average of the NPV for the MRI machine. The expected value is good, but there is a(n) 20% probability of the NPV being negative. B. The expected NPV is the weighted-average of the NPV for the MRI machine. The expected value is good, since there is a 0% probability of the NPV being negative. C. The expected NPV is the weighted-average of the NPV for the MRI machine. The expected value is bad, since there is a(n) 20% probability of the NPV being negative. D. The expected NPV is the weighted-average of the NPV for the MRI machine. The expected value is bad, since the probability of low demand is higher than the probability of high demand.

b. Assuming that the probability of the medium demand state remains 50%, the maximum probability you can assign to the low-demand state and still have an expected NPV of 0 or higher is fl%. (Round to one decimal place.)