Pay master case study(make a decision tree)

3 people has a job for average salaries $120 thousand. They have to choice weather quit the job or stay in the part-time.

If they commit to the venture full-time, they believe a product can be ready for testing in about 12 months. If they work only part-time on the venture, development is expected to take approximately 18 months. The partners believe that if they resign their positions to work on the venture, finding a new position at comparable salary would require about six months of searching.

In particular, they believe that, if they resign to pursue the venture and if the service goes into the testing stage, there is about a 40 percent chance that a licensee will value their preliminary development efforts at about $7 million. The probability of an offer in the $4 million range is about 30 percent, and the probability of an offer of around $1.5 million is also about 30 percent. Their expectations are somewhat different if they decide to pursue the project on a part-time basis. In this case, if the venture goes into the testing stage, the probability of an offer of about $6 million is about 20 percent, the probability of an offer of about $4 million is about 40 percent, and the probability of an offer around $1.5 million is about 40 percent. In part, the lower estimates are due to the longer time that would be needed for development. However, the partners also believe their decision not to resign to pursue the venture full-time would reflect negatively on valuation by outside investors.

If the service is not licensed after preliminary development is complete, the three partners would undertake testing and revising the service, to prepare it for commercial distribution. Distribution could be by direct marketing, such as via Internet advertising, or the partners could license distribution to a major company. Licensing, again, has some distinct advantages. An existing large firm could probably reach the market more quickly and effectively than could the partners. If licensing is selected the licensee would bear the costs of marketing and distributing the service. If not, the partners estimate that they would need the present valued equivalent of about $4 million to do an effective job of distribution and marketing. Again, they have attempted to represent their uncertainties about the future in terms of scenarios. At this stage, they believe there is a 20 percent chance that a potential licensee would value their cumulative effort at a present value of $8 million, a 30 percent chance of a value of about $5 million, and a 50 percent chance of a value of about $1 million. Their current assessment of the present value of the venture, if they were to undertake distribution on their own is $6.5 million. Doing so would require the partners to commit full time to the venture, and the $6.5 million value is net of the value of their own time commitments during the distribution phase. From this, the cost of distribution and marketing would need to be deducted.