A particular company is considering a $3 million research and development (R&D) project. Profit projections appear promising, but the president of the company is concerned because the probability that the R&D project will be successful is only 0.50. Secondly, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $23 million. Under this option, the company would not build the $20 million production facility. Consider the decision tree. Start R&D Project ($3 million) Successful .5 Not Successful Do Not Start R&D Project Building Facility ($20 million) 3 Sell Rights (4 What is the expected value of your strategy (in millions of dollars)? x million dollars High Demand .5 Medium Demand Low Demand .2 Profit ($ millions) 38 20 10 (c) Develop a risk profile for the optimal strategy. (Submit a file with a maximum size of 1 MB.) 4Choose File No file chosen This answer has not been graded yet. 20 n The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high-demand outcome is $61 million. However, the cost of the R&D project ($3 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $61 - $3-$20-$38 million. Branch probabilities are also shown for the chance events. (a) Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? O Start the R&D project. If it is successful, sell the rights. Start the R&D project. If it is successful, build the facility. O Do not start the R&D project. 0 (b) What must the minimum selling price (in millions of dollars) be for the company to consider selling the rights to the product? The selling price must be at least x million dollars.

A particular company is considering a $3 million research and development (R&D) project. Profit projections appear promising, but the president of the company is concerned because the probability that the R&D project will be successful is only 0.50. Secondly, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $23 million. Under this option, the company would not build the $20 million production facility. Consider the decision tree. Start R&D Project ($3 million) Successful .5 Not Successful Do Not Start R&D Project Building Facility ($20 million) 3 Sell Rights (4 What is the expected value of your strategy (in millions of dollars)? x million dollars High Demand .5 Medium Demand Low Demand .2 Profit ($ millions) 38 20 10 (c) Develop a risk profile for the optimal strategy. (Submit a file with a maximum size of 1 MB.) 4Choose File No file chosen This answer has not been graded yet. 20 n The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high-demand outcome is $61 million. However, the cost of the R&D project ($3 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $61 - $3-$20-$38 million. Branch probabilities are also shown for the chance events. (a) Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? O Start the R&D project. If it is successful, sell the rights. Start the R&D project. If it is successful, build the facility. O Do not start the R&D project. 0 (b) What must the minimum selling price (in millions of dollars) be for the company to consider selling the rights to the product? The selling price must be at least x million dollars.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Transcribed Image Text:A particular company is considering a $3 million research and development (R&D) project. Profit projections appear promising, but the president of the company is concerned because the probability that the R&D project will be successful is only 0.50. Secondly, the president knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $23 million. Under this option, the company would not build the $20 million production facility. Consider the decision tree. Start R&D Project ($3 million) 1 Successful .5 Not Successful .5 Do Not Start R&D Project 3 Building Facility ($20 million) Sell Rights 4 What is the expected value of your strategy (in millions of dollars)? 2 x million dollars High Demand .5 Medium Demand .3 Low Demand .2 Profit ($ millions) 38 20 10 (c) Develop a risk profile for the optimal strategy. (Submit a file with a maximum size of 1 MB.) 4 Choose File No file chosen This answer has not been graded yet. 20 -3 Ⓡ The profit projection for each outcome is shown at the end of the branches. For example, the revenue projection for the high-demand outcome is $61 million. However, the cost of the R&D project ($3 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $61 $3-$20 = $38 million. Branch probabilities are also shown for the chance events. (a) Analyze the decision tree to determine whether the company should undertake the R&D project. If it does, and if the R&D project is successful, what should the company do? O Start the R&D project. If it is successful, sell the rights. Start the R&D project. If it is successful, build the facility. O Do not start the R&D project. 0 (b) What must the minimum selling price (in millions of dollars) be for the company to consider selling the rights to the product? The selling price must be at least 3 X million dollars.

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