ECE 192, Spring 2023

Tutorial #9

1. Regional Express is a small courier service. By introducing a new computerized tracking device, it
anticipates some increase in revenue, currently estimated at $2.75 per parcel. The possible new
revenue ranges from $2.95 to $5.00 per parcel, with probabilities shown in the table below. Assuming
that Regional´s monthly capacity is 60000 parcels and the monthly operating and maintenance costs
are $80000, what is the present worth of the expected revenue over 12 months? Regional´s MARR is
12 percent, compounded monthly.

Revenue per parcel $2.95 $3.25 $3.50 $4.00 $5.00

Probability 0.1 0.35 0.3 0.15 0.1

2. 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 technology, and there is some uncertainties 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 0.10 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) Based on a five-year study period, what is the present worth of the new robot for each
performance scenario? Assume BB’s MARR is 12 percent.
b) Construct a decision tree. Based on EV, should BB approve the development of a new robot?

3. Rockies Adventure Wear, Inc., sells athletic and outdoor clothing through catalogue sales. Its managers
want to upgrade their order-processing centre so that they have less chance of losing customers by
putting them on hold. The upgrade may result in a processing capacity of 30, 40, 50, or 60 calls per
hour with the probabilities of 0.2, 0.4, 0.3, and 0.1, respectively. Market research indicates that the
average number of calls that Rockies may receive is 50 per hour. How many customers are expected
to be lost per hour due to the lack of progressive capacity?

4. Rockies Adventure Wear, Inc. has upgraded its order-processing centre in order to improve the
processing speed and customer access rate. Before completely switching to the upgraded system,
Rockies has an option of testing it. The test will cost Rockies $50,000, which includes the testing cost
and loss of business due to shutting down the business for a half-day. If Rockies does not test the
system, there is a 55 percent chance of severe failure ($150,000 repair and loss of business costs), a 35
percent chance of minor failure ($35,000 repair and loss of business costs), and a 10 percent chance
of no failure. If Rockies tests the system, the result can be favorable with the probability of 0.34, which
requires no modification, and not favorable with the probability of 0.66. If the test result is not
ECE 192, Spring 2023

favorable, Rockies has two options: minor modification and major modification. The minor
modification costs $5,000 and the major modification costs $30,000. After the minor modification,
there is still a 15 percent change of severe failure ($150,000 costs), a 45 percent chance of minor failure
($35,000 costs), and a 40 percent chance of no failure. Finally, after the major modification, there is
still a 5 percent chance of severe failure, a 30 percent chance of minor failure, and a 65 percent chance
of no failure. What is the recommended action for Rockies, using a decision tree analysis?

5. St. Jacobs Cheese Factory (SJCF) is getting ready for a busy tourist season. SJCF wants to either increase
production or produce the same amount as last year, depending on the demand level for the coming
season. SJCF estimates the probabilities for high, medium, and low demands to be 0.4, 0.35 and 0.25,
respectively, on the basis of the number of tourists forecasted by the local recreational bureau. If SJCF
increases production, the expected profits corresponding to high, medium, and low demands are $750
000, $350 000, and $100 000, respectively. If SJCF does not increase production, the expected profits
are $500 000, $400 000, and $200 000, respectively. Construct a decision tree for SJCF. On the basis of
EV, what should SJCF do?