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Hemmingv ay Inc., is conside ng 5 million esearch and development R&D) pro ect. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D p o ect 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 s20 mililion 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 at irthe R&D pro ect 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. FIGURE 4.16 DECISION TREE FOR HEMMINGWAY, INC. Profit (S millions) High Demand 0.5 34 Building Facility ($20 million) Medium Demand 0.3 20 Low Demand 0.2 10 Successful Start R&D Project ($5 million) Sell Ri 20 Not Successful 0.5 Do Not Start the R&D Project The decision tree is shown in Figure 4.16. The profit projection for each outcome is shown at the end of the branches, For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility (s20 million) show the profit of this outcome to be $59 - $ $20-$34 mllion. Branch probabilities are elso shown for the chance events a. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and ithe R&D project is successful, what should the company do? Yes, the company should start the R&D p What is the expected value of your strategy? Expected value = $ and if it is successful, then the company should build the facili Hemmingv ay Inc., is conside ng 5 million esearch and development R&D) pro ect. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D p o ect 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 s20 mililion 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 at irthe R&D pro ect 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. FIGURE 4.16 DECISION TREE FOR HEMMINGWAY, INC. Profit (S millions) High Demand 0.5 34 Building Facility ($20 million) Medium Demand 0.3 20 Low Demand 0.2 10 Successful Start R&D Project ($5 million) Sell Ri 20 Not Successful 0.5 Do Not Start the R&D Project The decision tree is shown in Figure 4.16. The profit projection for each outcome is shown at the end of the branches, For example, the revenue projection for the high demand outcome is $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility (s20 million) show the profit of this outcome to be $59 - $ $20-$34 mllion. Branch probabilities are elso shown for the chance events a. Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and ithe R&D project is successful, what should the company do? Yes, the company should start the R&D p What is the expected value of your strategy? Expected value = $ and if it is successful, then the company should build the facili
