Q4. ABC Inc. is considering a R&D project which will cost $5 million to do. ABC's President is concerned because he feels there is only a probability of 50% chance that the project will be successful. Secondly, the President knows that if the R&D project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is build, profits will depend on whether the demand for the product is high, medium or low. The probabilities and payoff are high= 0.5= $59M; med= 0.3-$45M; low- 0.2= $35M. Another option is that if R&D is successful, the company could sell the rights to the product for $25M. If sells the rights, then of course, it would not have to build the facility to produce the product. (a) Use a decision tree to determine what ABC should do to maximize expected profits. (b) Suppose ABC decides to start the R&D project. Provide a risk profile for this decision? (c) Suppose the price for which ABC can sell the rights is uncertain and will depend on whether there is a recession or not. If there is a no recession, then it can get $35M, if recession then it will get $20M. What would the range of probability of no recession for ABC to want to sell the rights? (d) Suppose you can hire a consulting firm that can tell you for sure whether the demand would be high, medium or low, but the firm cannot tell you whether the project will be a success or fail. How much would you be willing to pay for this "partial" perfect information? (e) Consider the original problem. Suppose ABC decides to start the project and the project is successful. However, before deciding whether to build the new facility or sell the rights, ABC can hire a marketing research firm to determine if the demand would be high, medium or low. The marketing firm would conduct some surveys and advise ABC whether the results are good or bad. ABC feels that there is a 60% chance the results would be good. If the results are good, there is a 70% chance the demand would be high and 25% chance medium. If the results are bad, there is a 10% chance the demand would be high and 60% chance medium. What should ABC do and what is the maximum price ABC should pay for the research?