4- (25 points) The managers of the XYZ Company have to decide which of three products to introduce, A, B, or C. Product C is essentially a risk-free proposition, from which the company will obtain a net profit of $1 million Product B is considerably more risky. Sales may be high with 38% chance, with resulting net profit of $8 million, medium with net profit of $4 million, or low with a chance of 50%, in which case the net profit will be $0. Product A poses something of a difficulty; a problem with the production system has not yet been solved. The engineering division has indicated its confidence in solving the problem, but there is a 5% chance that finding the solution may take a long time. In this situation, there will be a delay in introducing the product. Another issue is the price for Product A. The options are to introduce it at either high or low price; the price would not be set until just before the product is to be introduced. Both of these issues have an impact on the ultimate net profit as stated below. TIME DELAY High Price Low Price High Price Low Price High Sales $5 million $3.5 million $8 million $4.5 million Low Sales $-0.5 million $1 million $*million $1.5 million NO DELAY Finally, once the product is introduced, sales can be either high or low. If the company decides to set a low price, then low sales are just as likely as high sales. If the company sets a high price and if there was no delay the probability is 0.4 that sales will be high. However, if there is a delay and the price is set high, the probability is only 0.3 that sales will be high. Draw a complete decision tree for the given case and solve the decision tree with calculating EMV. What should the managers do? NOTE: In this question, write the last number of your student ID instead of then solve the question. He 4- (25 points) The managers of the XYZ Company have to decide which of three products to introduce, A, B, or C. Product C is essentially a risk-free proposition, from which the company will obtain a net profit of $1 million Product B is considerably more risky. Sales may be high with 38% chance, with resulting net profit of $8 million, medium with net profit of $4 million, or low with a chance of 50%, in which case the net profit will be $0. Product A poses something of a difficulty; a problem with the production system has not yet been solved. The engineering division has indicated its confidence in solving the problem, but there is a 5% chance that finding the solution may take a long time. In this situation, there will be a delay in introducing the product. Another issue is the price for Product A. The options are to introduce it at either high or low price; the price would not be set until just before the product is to be introduced. Both of these issues have an impact on the ultimate net profit as stated below. TIME DELAY High Price Low Price High Price Low Price High Sales $5 million $3.5 million $8 million $4.5 million Low Sales $-0.5 million $1 million $*million $1.5 million NO DELAY Finally, once the product is introduced, sales can be either high or low. If the company decides to set a low price, then low sales are just as likely as high sales. If the company sets a high price and if there was no delay the probability is 0.4 that sales will be high. However, if there is a delay and the price is set high, the probability is only 0.3 that sales will be high. Draw a complete decision tree for the given case and solve the decision tree with calculating EMV. What should the managers do? NOTE: In this question, write the last number of your student ID instead of then solve the question. He
