Silicon, Inc., a semiconductor manufacturer, is investigating the possibility of producing and marketing a microprocessor. Undertaking this project will require either purchasing a sophisticated CAD system or hiring and training several additional engineers. The market for the product could be either favorable or unfavorable. Silicon, Inc., of course, has the option of not developing the new product at all.

With favorable acceptance by the market, sales would be 25,000 processors selling for $100 each. With unfavorable acceptance, sales would be only 8,000 processors selling for $100 each. The cost of CAD equipment is $500,000, but that of hiring and training three new engineers is only $375,000. However, manufacturing costs should drop from $50 each when manufacturing without CAD to $40 each when manufacturing with CAD.

The probability of favorable acceptance of the new microprocessor is .40; the probability of unfavorable acceptance is .60.

APPROACH c Use of a decision tree seems appropriate as Silicon, Inc., has the basic ingredients: a choice of decisions, probabilities, and payoffs