Draw the appropriate decision tree. Calculate the expected value for all courses of action. What action yields the highest expected value?
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A company manufactures a specialty pollution-sensing device for the offshore oil industry. The company is considering whether to replace it with a newer model. The firm's three choices are:
- keep the old model
- design a replacement device with internal resources
- purchase a new design
The market for these devices will be either "receptive" or "neutral" to the replacement model. The financial estimates are as follows: Keeping the old design will yield a profit of $6 million dollars. Designing the replacement internally will yield $10 million if the market is "receptive," but a $2 million loss if the market is "neutral." Acquiring the new design from the supplier will profit $4 million under "receptive," and $2 million under "neutral." The company feels that the market has a 70 percent chance of being "receptive" and a 30 percent chance of being "neutral." Draw the appropriate decision tree. Calculate the expected value for all courses of action. What action yields the highest expected value?
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