Answer to Question #307816 in Management for HAILU

Question

The cost of the development project is $500,000. The probability of successful development is projected to be 70%. If the development is unsuccessful, the project will be terminated. If it is successful, the manufacturer must then decide whether to begin manufacturing the product on a new production line or a modified production line. If the demand for the new product is high, the incremental revenue for a new production line is $1,200,000, and the incremental revenue for the modified production line is $850,000. If the demand is low, the incremental revenue for the new production line is $700,000, and the incremental revenue for the modified production line is $150,000. Consider that the cost of developing a new product line is $300,000 and for the modified product line is birr $100,000. The probability of high demand is estimated as 40%, and of low demand as 60%

a. Draw up an appropriate decision tree for the given project.

b. What strategy maximizes the project’s expected profit?

Answer 1

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