Start R&D Project ($5 million)Do Not Start the R&D ProjectPossible ProfitExpected value = $b. 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 $c. Develop a risk profile for the optimal strategy. If required, round your answers to two decimal places.$34M$20M$10M-$5M10 MTotal ProbabilityThe 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 outcon($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 chancea. 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?Yes, the company should start the R&D project and if it is successful, then the company should build the facility.What is the expected value of your strategy?AssociatedProbability0.250.15Not Successful0.50.1Sell Rights0.5120-5025 M or more. In order to recover the $5M R&D cost, the selling price would have to be $30 M or more. Problem 4-17Hemmingway, 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 only0.50. 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, uncertaintyremains 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.FIGURE 4.16 DECISION TREE FOR HEMMINGWAY, INC.Start R&D Project ($5 million)Do Not Start the R&D ProjectSuccessful0.5Not Successful0.53Building Facility ($20 million)Sell RightsProfit ($ millions)34High Demand0.5Medium Demand0.3Low Demand0.2201020-50The 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.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?Yes, the company should start the R&D project and if it is successful, then the company should build the facility.PreviousNext >

Decision tree: A decision tree shows model of alternatives available to the decision maker, along…

Answered: The decision tree is shown in Figure…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

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Transcribed Image Text:Start R&D Project ($5 million) Do Not Start the R&D Project Possible Profit Expected value = $ b. 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 $ c. Develop a risk profile for the optimal strategy. If required, round your answers to two decimal places. $34M $20M $10M -$5M 10 M Total Probability 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 outcon ($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 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? Yes, the company should start the R&D project and if it is successful, then the company should build the facility. What is the expected value of your strategy? Associated Probability 0.25 0.15 Not Successful 0.5 0.1 Sell Rights 0.5 1 20 -5 0 25 M or more. In order to recover the $5M R&D cost, the selling price would have to be $ 30 M or more.