ICIs 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 productthat is, is it technically feasible?

After a production process is developed, would the companys 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 managements uncertainty about the true probabilities.

Significant market and technical feasibility (P1) 0.36 0.09

Board sanctions plant (P2) 0.8 0.2

Commercial success (P3) 0.8 0.2

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 commercial development costs after the boards sanction (C3): $1.0 25%

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

The plus-or-minus values indicate managements considerable uncertainty about the values.

Question

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