A local certified public accountant must decide which of two copying machines to purchase for her expanding business. The cost of purchasing the first machine is $3100, and the cost of maintaining the first machine each year is uncertain. The CPA’s office manager believes that the annual maintenance cost for the first machine will be $0, $150, or $300 with probabilities 0.325, 0.475, and 0.20, respectively. The cost of purchasing the second machine is $3000, and the cost of maintaining the second machine through a guaranteed maintenance agreement is $225 per year. Before the purchase decision is made, the CPA can hire an experienced copying machine repairperson to evaluate the quality of the first machine. Such an evaluation would cost the CPA $100. If the repairperson believes that the first machine is satisfactory, there is a 65% chance that its annual maintenance cost will be $0 and a 35% chance that its annual maintenance cost will be $150. If, however, the repairperson believes that the first machine is unsatisfactory, there is a 60% chance that its annual maintenance cost will be $150 and a 40% chance that its annual maintenance cost will be $300. The CPA’s office manager believes that the repairperson will issue a satisfactory report on the first machine with probability 0.50.
a. Provided that the CPA wants to minimize the expected total cost of purchasing and maintaining one of these two machines for a one-year period, which machine should she purchase? When, if ever, would it be worthwhile for the CPA to obtain the repairperson’s review of the first machine?
b. Compute and interpret EVSI for this decision problem.
c. Compute and interpret EVPI for this decision problem.