Cachora Dynamics Corp (CDC) has designed a new integrated circuit that will allow it to enter, if it wishes, the microcomputer field. Otherwise, it can sell its rights for $15 million. If it chooses to build computers, the profitability of this project depends on the company's ability to market them during the first year. Two levels of sales are foreseen as two possible outcomes: selling 10,000 computers in case of low demand, but if it is successful it can sell up to 100,000 units (high demand). The cost of installing the production line is $6 million. The difference between the selling price and the variable cost of each computer is $600. a) Develop a formulation for decision analysis and use the non-probabilistic decision rules: Maximin and Minimax. b) Assume that the probability of high demand (p) is 50% and for low demand (1 - p) is 50%, apply the probabilistic criteria: Maximum expected value, Minimum loss of opportunity. c) Determine the VEIP. d) Carry out a sensitivity analysis for the probability of high demand (p).
Cachora Dynamics Corp (CDC) has designed a new integrated circuit that will allow it to enter, if it wishes, the microcomputer field. Otherwise, it can sell its rights for $15 million. If it chooses to build computers, the profitability of this project depends on the company's ability to market them during the first year. Two levels of sales are foreseen as two possible outcomes: selling 10,000 computers in case of low demand, but if it is successful it can sell up to 100,000 units (high demand). The cost of installing the production line is $6 million. The difference between the selling price and the variable cost of each computer is $600.
a) Develop a formulation for decision analysis and use the non-probabilistic decision rules: Maximin and Minimax.
b) Assume that the probability of high demand (p) is 50% and for low demand (1 - p) is 50%, apply the probabilistic criteria: Maximum expected value, Minimum loss of opportunity.
c) Determine the VEIP.
d) Carry out a sensitivity analysis for the probability of high demand (p).
Two decision alternatives: Sell rights, Build computers
Two states of nature: Demand will be low or Demand will be high
If sells the rights, the payoff = $15 million = $15,000,000
If build computers, the payoff will depend on the demand.
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