Problem 1 Frodo-Lay has a line of potato snacks named Spicy Curls. The snacks are sold in 10 ounce packages at a profit of $0.50 per package. Sales of Spicy Curls have been stable at 100,000 per year and are expected to continue at this level in future under present circumstances. Marketing is considering two possible advertising campaigns: a local campaign for $10,000 and a regional campaign for $100,000. Projections have been made for sales under each campaign: 100,000 units (probability local: 0.3, probability regional: 0.1), 200,000 units (local: 0.4, regional: 0.2), 300,000 units (local: 0.1, regional: 0.2), 400,000 units (local: 0.1, regional:0.2), and 500,000 units (local: 0.1, regional: 0.3). There is sufficient production capacity to maintain the current profit margin for at least 500,000 units. Be prepared to answer questions about this decision tree in the Blackboard assessment.

Problem 2 A small instrumentation company (2solderingIrons.com) wants to expand their business. The company has built pressure sensors and is considering the possibility of building a temperature sensor. From experience, they expect the development of a new pressure sensor to cost $10,000 (non-recurring expense or NRE). As they have no experience building a temperature sensor they are being conservative and estimating the development cost to be $100,000 (NRE). They anticipate sales of a working temperature sensor to total $1,000,000 in the first 12 months and the sales of a working pressure sensor to total $400,000 in the same first 12 months. The company currently has resources to attempt only one development project. Because the company has no experience developing temperature sensors, they consider the chances of a successful development to be even. Given the companys experience with development of pressure sensors, they believe they have 4 chances out of 5 for getting a new working sensor. Be prepared to answer questions about this decision tree in the Blackboard assessment.

Problem 3 Radio Schlock is considering the production of a new consumer product with a five-year product lifetime. A new production facility for this upcoming product will be required. Management must decide whether to build a large facility at an estimated cost of $1,000,000 or a smaller facility for an estimated $600,000. Preliminary market research indicates as 65% chance of high demand for the product. High demand for the product is expected to result in a $400,000 per year positive cash flow from a large facility or a $150,000 per year positive cash flow from a smaller facility. Low demand for the product is expected to result in a $50,000 per year positive cash flow from a smaller facility or a $50,000 per year loss from a large facility. A third option has been suggested: delay the decision while further product development is carried out. If the results of this product development are favorable, Marketing estimates there is a 90% chance of high demand for the product. In the event of unfavorable results, Marketing estimates there is a 40% chance of high demand. If Management chooses to pursue this additional product development one years sales will be lost, although cash flows will otherwise be the same as if the production facility had been built immediately. If the results of the further product development are unfavorable, Management has the option of shelving the project. It is assumed that there is a 50% chance of favorable results from the further product development. Use the total, undiscounted, cash flow in all calculations rather than NPV.