A manager is trying to decide whether to buy one machine or two. If only one machine is purchased and demand proves to be excessive, the second machine can be purchased later. Some sales would be lost, however, because the lead time for delivery of this type of machine is six months. In addition, the cost per machine will be lower if both machines are purchased at the same time. The probability of low demand is estimated to be 0.20 and that of high demand to be 0.80. The after-tax NPV of the benefits from purchasing two machines together is $90,000 if demand is low and $180,000 if demand is high. If one machine is purchased and demand is low, the NPV is $120,000. If demand is high, the manager has three options: (1) doing nothing, which has an NPV of $110,000; (2) subcontracting, with an NPV of $140,000; and (3) buying the second machine, with an NPV of $120,000.

1. Choose the best decision. (Note that each payoff is given in thousands of dollars). and what is its expected payoff?

Best decision is to buy ___ machine(s) and its expected payoff is $________. (Enter your responses as integers.)

OA. OB. Low demand 0.20 120 Do nothing Buy 1 120 Do nothing Buy 2 machines machine Subcontract 1 High demand 0.80 2 1 Low demand 0.80 High demand 0.20 Low demand 0.80 High demand 0.20 Subcontract 2 Buy 2 90 machines Buy 2 machines Buy 2 machines Buy 1 machine Low demand 0.20 90 180 OC. D. Low demand 90 Do nothing 120 Do nothing Buy 1 Buy 1 2 machine High demand Subcontract machine Subcontract 4 2. 1 Buy 2 1 Low demand 0.20 High demand 0.80 Low demand 0.20 High demand 0.80 Buy 2 Low demand 120 machines 90 machines Buy 2 Buy 2 3 machines High demand machines 180 180