Analyze the decision tree to determine whether the company should undertake the R&D project. ![]() Branch probabilities are also shown for the chance events. 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. For example, the revenue projection for the high demand outcome is $59 million. The profit projection for each outcome is shown at the end of the branches. The decision tree is shown in Figure 4.16. Under this option, the company would not build the $20 million production facility. 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. If the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. 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. ![]() 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. Business Operations Management Q&A Library Hemmingway, Inc., is considering a $5 million research and development (R&D) project.
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