Bockville Brackets (BB) uses a robot for welding small brackets onto car-frame assemblies. BB's R&D team is proposing a new design for the welding robot. The new design should provide substantial savings to BB by increasing efficiency in the robot's mobility. However, the new design is based on the latest technology7 , and there is some uncertainty7 associated with the performance level of the robot. The R&D team estimates that the new robot may exhibit high, medium, and low performance levels with the probabilities of 0.35, 0.55, and 0.05 respectively. The annual savings corresponding to high, medium, and low performance levels are $500 000, $250 000, and $150 000 respectively.
The development cost of the new robot is $550 000.
(a) On the basis of a five-year study period, what is the present worth of the new robot for each performance scenario? Assume BB's ALARR is 12%.
(b) Construct a decision tree. On the basis of EV, should BB approve the development of a new robot?