Software applications that use augmented reality can provide an enhanced version of the real-world by adding digital elements such as visual graphics, sounds, and other sensory feedback to the user.

Augmented reality has been applied to settings such as healthcare, military, and entertainment.

According to a 2022 article by Yahoo! Finance, the global market size of augmented reality software applications is estimated to surpass $332 billion in 2028.

However, there is considerable uncertainty in this estimated market size because the technologies to support augmented reality are still being developed and there is little history on its use.

Consider the case of AR Ventures, a venture-capital firm that provides support for start-up companies using augmented reality technology. AR Ventures has the opportunity to invest in one of two start-ups utilizing augmented reality technology: one that is developing a healthcare application and one that is developing an entertainment application.

The healthcare application uses augmented reality to help train medical students, and the entertainment application allows people to compete virtually in the sport of badminton. AR Ventures believes that the potential market size of the healthcare application is larger, but that the technology needed for this application is unproven.

The technology used for the entertainment application is more well established, but the market size is likely smaller.
Suppose that demand for the entertainment application is estimated to be high, medium, or low with the following associated revenues, costs, and probabilities.

The costs associated with the healthcare application are largely dependent on the success of one particular new device that would be worn by the medical students. If the current protype of the device proves to be successful, the costs will be significantly lower than if the prototype device is not successful. The estimated revenues, costs, and probabilities of different demand scenarios for each possibility follow. AR Ventures would like to make the decision of which application in which to invest based on profit (revenue 2 cost).

a. Develop a decision tree for the AR Ventures problem.

b. Suppose that AR Ventures believes it is equally likely that the healthcare application device prototype will be successful as it is that the prototype will be unsuccessful.
Using an expected value approach would you recommend that AR Ventures invests in the entertainment application or the healthcare application?

c. Would your recommendation in part(b) change if the probability of the prototype being successful is only 0.25? Why or why not?

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Demand Entertainment Application High Medium Low Revenue ($ millions) 1.80 1.00 0.25 Cost ($ millions) 1.10 0.80 0.60 Probability 0.40 0.30 0.30