The Walwyn Widgets Company operates a thriving mail-order business and has achieved con¬ siderable success using television advertisements to promote new products, novelty items, record and tape collections of music, and so forth. The Director of New-Product Development, Charles van Winkle, has presented to the Executive Committee three new product suggestions, one of which will be the next product produced and sold. Because of limited availability of television time, sales personnel, and production facilities, only one of these projects can be im¬ plemented now. The other two will be set aside and will compete with any new possibilities that arise in the future.

Product A is an electronic message board that is preprogrammed to roll a series of mes¬ sages across the screen, including “Have a Nice Day! and God Loves You. This product is expected to encounter very stiff competition after two years. The initial setup cost of Product A is $40,000. Product B is a collection of country music on a videotape album, initially costing $250,000, because of the permissions that must be purchased. Market research indicates that the market for this product will be saturated after two years. Product C, initially costing $30,000 is an antitheft alarm system for automobiles which is also expected to have only a two-year life because of rapid technological advances. Mr. van Winkle has obtained estimates of profits and probability distributions associated with each product, as shown on page 67.

Assume that these profits are received at the end of the year and that Walwyn Widgets could otherwise invest the funds at 14 percent in a mutual fund, judged by Mr. van Winkle to be roughly equal in risk to the three proposals presented.

(a) Using decision-tree analysis, find the expected net present value of each proposal and calcu¬ late a measure of risk for each proposal.

(b) Apply several decision criteria to the choice problem and advise Mr. van Winkle which product he should choose.

(c) State any qualifications and reservations you would wish to add to your decision.

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Product Profits YEAR 1 Probability Profits YEAR 2 Probability $ 30,000 0.60 $ 30,000 0.65 A 80,000 0.30 60,000 0.25 100,000 0.10 80,000 0.10 100,000 0.30 50,000 0.35 B 300,000 0.50 100,000 0.40 500,000 0.20 150,000 0.25 -25,000 0.20 15,000 0.30 C 50,000 0.40 50,000 0.40 100,000 0.40 75,000 0.30