ICI Canada

ICI's Canadian subsidiary (now part of AkzoNobel) discovered a new but unpatentable application for a chemical agent to reduce pulp-mill water pollution.17 However, everything was quite uncertain, and the management was trying to decide whether to go ahead with its R&D or abandon the product. The following questions indicate the primary risks:

Would market tests confirm that there is a significant market for the product and could the company develop a new process for making this product-that is, is it technically feasible?

. After a production process is developed, would the company's board sanction production on a commercial scale? Would the venture turn out to be commercially successful?

The management team assumed that each of these questions had a yes or no answer. The probabilities of yes answers are shown below. The plus-or-minus values indicate management's uncertainty about the true probabilities.

Significant market and technical feasibility (P)

0.36 0.09

Board sanctions plant (P2)

0.8 0.2

Commercial success (P3)

0.80.2

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The primary economic factors and their expense/gain (in million dollars) were the following:

The marketing development cost to determine whether there is a significant market, and research expenses to identify a new production process for the product (C1): $1 25%

The process development costs, including pre-sanction engineering and commercial development (C2): $3.5+ 25% . The process development costs, including pre-sanction engineering and commercial development (C2): $3.5 25% The commercial development costs after the board's sanction (C3): $1.0 25%

The venture value (net present value) if successful (R): $25 50%

The plus-or-minus values indicate management's considerable uncertainty about the values.

Question

Should management go ahead with R&D for this product? How can this question be fully answered?