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R&R Limited has developed a new type of aircraft engine and the company is planning to bring the engine to the market. One possibility is
R&R Limited has developed a new type of aircraft engine and the company is planning to bring the engine to the market. One possibility is to immediately license the product rights to another company that will market and sell the product. The best estimate for this alternative is a payoff of 3 million in licensing fees. Two other possibilities are to build a large manufacturing plant now to produce the product or build a small plant now to produce the product with the option of expanding the plant in three years. The expected payoff from producing the product depends on the market acceptance of the product during the first three years and during the next five years. If the market acceptance in the first three is low, R&R Limited will stop production and cut its losses at that point. Analysts at R&R Limited have estimated a 70% probability of a high market acceptance in the first 3 years. If the market acceptance is high in the first three years, they believe the probability of a high market acceptance in the next five years to be 60%. The following tables give the net payoff estimates (in millions) for producing the product (the negative payoff means a loss to the company): Market Acceptance First 3 Years High High Low Next 5 Years Highi LOW Large Plant 15m 4m -2m Small Plant Don't Expand 10m 6m 3m Small Plant Expand 12m 4m Managerial report: Perform a decision analysis of the problem facing R&R Limited and prepare a report that summarises your findings, recommendations and critical appraisal. Include the following information in your report A decision tree that shows the logical sequence of the decision problem. o A recommendation of a course of action to the company. What would be the decision if the company adopts a risk-averse decision strategy? A complete profitloss table showing the possible levels of profit the company can make and the associated probabilities A critical appraisal. R&R Limited has developed a new type of aircraft engine and the company is planning to bring the engine to the market. One possibility is to immediately license the product rights to another company that will market and sell the product. The best estimate for this alternative is a payoff of 3 million in licensing fees. Two other possibilities are to build a large manufacturing plant now to produce the product or build a small plant now to produce the product with the option of expanding the plant in three years. The expected payoff from producing the product depends on the market acceptance of the product during the first three years and during the next five years. If the market acceptance in the first three is low, R&R Limited will stop production and cut its losses at that point. Analysts at R&R Limited have estimated a 70% probability of a high market acceptance in the first 3 years. If the market acceptance is high in the first three years, they believe the probability of a high market acceptance in the next five years to be 60%. The following tables give the net payoff estimates (in millions) for producing the product (the negative payoff means a loss to the company): Market Acceptance First 3 Years High High Low Next 5 Years Highi LOW Large Plant 15m 4m -2m Small Plant Don't Expand 10m 6m 3m Small Plant Expand 12m 4m Managerial report: Perform a decision analysis of the problem facing R&R Limited and prepare a report that summarises your findings, recommendations and critical appraisal. Include the following information in your report A decision tree that shows the logical sequence of the decision problem. o A recommendation of a course of action to the company. What would be the decision if the company adopts a risk-averse decision strategy? A complete profitloss table showing the possible levels of profit the company can make and the associated probabilities A critical appraisal
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