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Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway's president is concerned because the probability that
Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million. Under this option, the company would not build the $20 million production facility. The uncertain demand has three outcomes: high with probability of 0.5, medium with probability of 0.3, and low with probability of 0.2. The associated profit projection are $59 million, $45 million, and $35 million for the high. medium and low outcomes respectively. a) Build a decision tree and analyze it to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? What is the expected value of your strategy? b) Determine the least price for the company to sell the rights to the product for
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