A manager of a manufacturing company is considering adding either a drilling machine or a knurling machine. The life cycle of the drilling machine follows a uniform distribution with parameters (2.1, 3.6) decades. The life cycle of the knurling machine follows a uniform distribution with parameters (1.2, 2.4) decades. The manager will replace the drilling machine when it has broken down or it has reached the age of 3 decades. He will replace the knurling machine when it has broken down or it has reached the age of 1.5 decades. A new drilling machine costs $40,000 while a new knurling machine costs $20,000. If the drilling or the knurling machine has broken down, an additional cost of $5,000 is incurred. Assume that both of the machines have no resale value. Based on the long run rate at which costs incur, should the manager buy a drilling machine or knurling machine?

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The manager should buy a knurling machine EXPLANATION The long run rate at which costs ... View the full answer