Question
Develop a decision tree and calculate EMV for the following scenario. A Software company is considering improving its current software application. The following options are
Develop a decision tree and calculate EMV for the following scenario. A Software company is considering improving its current software application. The following options are available for the company to make a final decision. The two options contemplated by the management are either to develop a new software application from scratch OR to consolidate its existing product. In case the first option is taken into consideration, there is a choice of either developing using RAD OR embarking into a thorough development activity. The thorough development will cost $150,000 whereas RAD will cost $80,000. There is a 40% chance that market conditions will be good and estimated revenue will be $1,000,000; there is a 40% chance is for moderate conditions which will result in an estimated revenue of $50,000; and there is a 20% chance for poor market conditions that will cause the revenue to fall to $2,000. For the RAD option, there is a 10% chance for good market conditions with $1,000,000 in revenue, 20% chance for moderate conditions with $50,000 in revenue, and 70% chance for poor conditions with $2,000 in revenue. If the firm decides to go ahead with the consolidation option, they will have to either strengthen the current version OR do nothing. It will cost $80,000 to strengthen the current version. There is a 30% chance for good market conditions leading to a $400,000 revenue, 40% chance of moderate conditions with a $20,000 revenue, and 30% chance of poor market conditions that will result in a $6000 revenue. For the option to do nothing, there is a 60% chance that market conditions will remain good with an estimated $20,000 in revenue, whereas there is a 40% chance of poor market conditions resulting in $2000 revenue.
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