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To absorb some short-term excess production capacity at its plant, the company is considering a short manufacturing run for either of two new products, a
To absorb some short-term excess production capacity at its plant, the company is considering a short manufacturing run for either of two new products, a temperature sensor or a pressure sensor. The market for each product is known if the products can be successfully developed. However, there is some chance that it will not be possible to successfully develop them. Revenue of $1,000,000 would be realized from selling the temperature sensor and revenue of $400,000 would be realized from selling the pressure sensor. Both amounts are net of production cost but do not include development cost. If development is unsuccessful for a product, then there will be no sales, and the development cost will be totally lost. Development cost would be $100,000 for the temperature sensor and $10,000 for the pressure sensor. The probability that the development of the sensor will be successful is 0.50 for the temperature sensor and 0.80 for the pressure sensor. 1. Construct a decision tree showing all the options available, the revenue and payoff for each option and the probability of success and failure for each option
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