The XYZ company makes battery charging technology for battery powered electric vehicles. It has recently discovered a new technology that will vastly reduce the charging time of such vehicles. XYZ intend to sell the technology as quickly as possible. They can approach a company that they have worked with in the past, ABC Automotive Electric, and try to make an exclusive technology sales deal. Such a negotiation has a 0.6 chance of yielding a high price outcome ($100M) and a 0.4 chance of yielding a low price outcome ($10M). Alternatively, XYZ could decide not to approach ABC and instead invest in quickly building a prototype system (at a cost of $10M). Although XYZ has confidence in the technology, they have little experience building prototypes and believes that there is only a 0.5 chance that they can produce a successful prototype in the time available. If the prototype is successful, XYZ could then market the technology more widely to the electric automobile industry and sell the technology to the highest bidder. Marketing the technology more widely with a successful prototype will yield a high market price ($500M) with probability 0.2 or a low market price ($100M) with probability 0.8. Alternatively, instead of marketing the technology more widely they could try to approach ABC Automotive Electric after a successful prototype. They believe that this would result in a sale for $140M. On the other hand, the prototype may fail, they would then liquidate the technology for $14M.

XYZ have written out their decision problem in the following decision tree. Squares represent decision nodes and circles represent chance nodes. The amount they will net on the technology for each sequence of outcomes and decisions is given on the right in millions of dollars. The probabilities are given on the branches of the chance nodes.

Prototype Fails 0.2 Do Prototype Market Price High 490 Market Widely O.R 05 Market Price Low Prototype Succeed 90 Approach ABC with successful prototype 130 06 High Outcome 100 Approach ABC 04 Low Outcome 10