Decision Trees

ACO Consulting has developed a promising new management system. The company's management faces three options: it can sell the idea for the new system to another company for $20,000; it can hire a consultant to study the market and make a decision; or it can obtain financing to develop and market the system. The study will cost ACO $10,000, and management believes there is a 50-50 chance that it will find the market favorable. If the study indicates unfavorable, management estimates that it will still be able to sell the idea for $12,000; if the study indicates favorable, it estimates that it will be able to sell the idea for $40,000. But even if a favorable market is found, the chance of having a successfully developed and commercialized system is about 0.4. A successfully developed and marketed system would have a return of $500,000. In the face of an unfavorable study, a successful developed and commercialized system can be expected to occur is 0.1. If ACO decides to develop and commercialize the product without a study, there would only be a 0.25 probability of success. A failure of the system will cost 100,000.

Draw the tree diagram.

What should ACO do?