Hemmingway, Inc., is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, 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 $25 million. Under this option, the company would not build the $20 million production facility. The decision tree is shown in Figure 4.16. 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 $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 − $5 − $20 = $34 million. Branch probabilities are also shown for the chance events. 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? What is the expected value of your strategy? Expected value = $ fill in the blank 2 M What must the selling price be for the company to consider selling the rights to the product? Payoff for sell rights would have to be $ fill in the blank 3M or more. In order to recover the $5M R&D cost, the selling price would have to be $ fill in the blank 4M or more. Develop a risk profile for the optimal strategy. If required, round your answers to two decimal places. Possible Profit Associated Probability $34M fill in the blank 5 $20M fill in the blank 6 $10M fill in the blank 7 -$5M fill in the blank 8 fill in the blank 9
Critical Path Method
The critical path is the longest succession of tasks that has to be successfully completed to conclude a project entirely. The tasks involved in the sequence are called critical activities, as any task getting delayed will result in the whole project getting delayed. To determine the time duration of a project, the critical path has to be identified. The critical path method or CPM is used by project managers to evaluate the least amount of time required to finish each task with the least amount of delay.
Cost Analysis
The entire idea of cost of production or definition of production cost is applied corresponding or we can say that it is related to investment or money cost. Money cost or investment refers to any money expenditure which the firm or supplier or producer undertakes in purchasing or hiring factor of production or factor services.
Inventory Management
Inventory management is the process or system of handling all the goods that an organization owns. In simpler terms, inventory management deals with how a company orders, stores, and uses its goods.
Project Management
Project Management is all about management and optimum utilization of the resources in the best possible manner to develop the software as per the requirement of the client. Here the Project refers to the development of software to meet the end objective of the client by providing the required product or service within a specified Period of time and ensuring high quality. This can be done by managing all the available resources. In short, it can be defined as an application of knowledge, skills, tools, and techniques to meet the objective of the Project. It is the duty of a Project Manager to achieve the objective of the Project as per the specifications given by the client.
Problem 4-17
Hemmingway, Inc., is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Hemmingway's president is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, 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 $25 million. Under this option, the company would not build the $20 million production facility.
The decision tree is shown in Figure 4.16. 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 $59 million. However, the cost of the R&D project ($5 million) and the cost of the production facility ($20 million) show the profit of this outcome to be $59 − $5 − $20 = $34 million. Branch probabilities are also shown for the chance events.
- 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?
What is the expected value of your strategy?
Expected value = $ fill in the blank 2 M - What must the selling price be for the company to consider selling the rights to the product?
Payoff for sell rights would have to be $ fill in the blank 3M or more. In order to recover the $5M R&D cost, the selling price would have to be $ fill in the blank 4M or more. - Develop a risk profile for the optimal strategy. If required, round your answers to two decimal places.
Possible ProfitAssociated Probability $34M fill in the blank 5 $20M fill in the blank 6 $10M fill in the blank 7 -$5M fill in the blank 8 fill in the blank 9
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