Nimbus Specialty Products Limited is considering launching a new product and has already carried out preliminary investigations
Question:
Nimbus Specialty Products Limited is considering launching a new product and has already carried out preliminary investigations both into the potential market and into problems associated with the manufacture of the product. It is estimated that the initial development work will cost 5,000 and it is believed that there is a 70% chance that it will be successful. If it is successful, then further development work will be carried out at a cost (after discounting) of 20,000. The company feels that there is a 10% chance of failure at this stage. Providing that the development work is satisfactory, the product will be launched, and the company considers that there would be a 25% chance of it being very successful, a 45% chance of being successful and a 30% chance of it being disappointing, where these terms are taken to mean that the net present value of profits earned from the launching date would be 60,000, 40,000, and 25,000 respectively.
i. Calculate the net revenues for each possible outcome.
Construct the decision tree with net revenues and probability
Calculate the expected value at each outcome.
iv. Calculate the expected profit of this project.
V. Present a discussion on the role that 'attitudes to risk' play in the selection of decision criteria and the importance of taking into consideration the various ethical decision-making approaches whilst developing a decision-making framework.