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2. What is the expected profit for this project? (a) $540,000 (b) $0 (c) $600,000 (d) $530,000 (e) $2,200,000

2. What is the expected profit for this project? (a) $540,000 (b) $0 (c) $600,000 (d) $530,000 (e) $2,200,000

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Use the following information to answer questions 1 to 5. A firm is deciding whether or not to enter a new market. The decision tree for the firm is provided below. The prompt below the decision tree explains how the decision tree was created. Enter Do Not Enter Allowed 0.9 Denied 0.1 3 Research No Research Good 0.7 Bad 0.3 5 6 Produce Sell Produce Sell Produce Sell 8 9 10 High 0.75 Low 0.25 High 0.25 Low 0.75 High 0.6 Low 0.4 Profit (5000s) 1200 -800 -200 1200 -800 -200 1400 -600 0 -100 0 At node 1, the firm must decide whether to enter the new market or not. The cost of attempting to enter is $100,000. The upper branch from node 2 shows that the firm has a 0.9 probability of being allowed to enter the market. If the firm is allowed to enter, it will have to pay $1,500,000 to buy the facilities required to become a part of the market. Node 3 shows that the firm will then consider doing a research study to forecast demand for their new product prior to beginning production. The cost of this study is $200,000. Node 4 is a chance node showing the possible outcomes of the market research study. Nodes 5, 6, and 7 are similar in that they are the decision nodes for the firm to either produce the products or sell their facilities to someone else. The decision to build the complex will result in an income of $3,000,000 if demand is high and $1,000,000 if demand is low. If the firm chooses to sell the facilities and entry into the market, income from the sale is estimated to be $1,600,000. The probabilities shown at nodes 4, 8, and 9 are based on the projected outcomes of the market research study.
Transcribed Image Text:Use the following information to answer questions 1 to 5. A firm is deciding whether or not to enter a new market. The decision tree for the firm is provided below. The prompt below the decision tree explains how the decision tree was created. Enter Do Not Enter Allowed 0.9 Denied 0.1 3 Research No Research Good 0.7 Bad 0.3 5 6 Produce Sell Produce Sell Produce Sell 8 9 10 High 0.75 Low 0.25 High 0.25 Low 0.75 High 0.6 Low 0.4 Profit (5000s) 1200 -800 -200 1200 -800 -200 1400 -600 0 -100 0 At node 1, the firm must decide whether to enter the new market or not. The cost of attempting to enter is $100,000. The upper branch from node 2 shows that the firm has a 0.9 probability of being allowed to enter the market. If the firm is allowed to enter, it will have to pay $1,500,000 to buy the facilities required to become a part of the market. Node 3 shows that the firm will then consider doing a research study to forecast demand for their new product prior to beginning production. The cost of this study is $200,000. Node 4 is a chance node showing the possible outcomes of the market research study. Nodes 5, 6, and 7 are similar in that they are the decision nodes for the firm to either produce the products or sell their facilities to someone else. The decision to build the complex will result in an income of $3,000,000 if demand is high and $1,000,000 if demand is low. If the firm chooses to sell the facilities and entry into the market, income from the sale is estimated to be $1,600,000. The probabilities shown at nodes 4, 8, and 9 are based on the projected outcomes of the market research study.
2. What is the expected profit for this project? (a) $540,000 (b) $0 (c) $600,000 (d) $530,000 (e) $2,200,000
Transcribed Image Text:2. What is the expected profit for this project? (a) $540,000 (b) $0 (c) $600,000 (d) $530,000 (e) $2,200,000
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