QAT 1 TASK 5
A.)
1st Decision Branch (Develop new product thoroughly)
E(X) =0.4(500,000) +0.4(25,000) +0.2(1,000) = 210,200 EV
2nd Decision Branch (Develop new product rapidly)
E(X) =0.1(500,000) +0.2(25,000) +0.7(1,000) = 55,700 EV
3rd Decision Branch (Consolidate existing product, and strengthen product)
E(X) = 0.3(200,000) + 0.4(10,000) +0.3(3,000) = 64,900 EV
4th Decision Branch (Consolidate existing product, reap without investing)
E(X) = 0.6(10,000) + 0.4(1,000) = 6,400 EV
B.) The decision alternative that has the most favorable total expected value is to develop new product thoroughly with a total expected value of 210,200. 1.) The Company has determined that it has two alternatives for improving profits: develop new products either rapidly or thoroughly, or consolidate existing products by strengthening products or reaping without investing. On the first branch of the decision tree we know that the decision to develop thoroughly has a probability of 0.4 in a good market and predicted gains of $500,000. The second State of nature would be a moderate market reaction with a probability of .4 and predicted gains of $25,000. The third state of nature is a poor market reaction with a probability of .2 with predicted gains of $1,000. The expected monetary value (EMV) is determined by multiplying the probability in each state of nature by the predicted gains and then adding sums of each state of nature. The EMV (Developing thoroughly) =.4(500,000) +.4(25,000) +.2(1,000) =210,200
The second branch of the decision tree we know that the decision to develop rapidly has a probability of 0.1 in a good market reaction with predicted gains of $500,000. The second state of nature is a moderate market reaction with a probability of .2 and predicted gains of $25,000. The third state of nature is a poor reaction with a probability of .7 with predicted gains of $1,000. The EMV (Developing Rapidly) = .1(500,000) +.2(25,000) +.7(1,000) =55,700
The third branch of the decision
1st Decision Branch (Develop new product thoroughly)
E(X) =0.4(500,000) +0.4(25,000) +0.2(1,000) = 210,200 EV
2nd Decision Branch (Develop new product rapidly)
E(X) =0.1(500,000) +0.2(25,000) +0.7(1,000) = 55,700 EV
3rd Decision Branch (Consolidate existing product, and strengthen product)
E(X) = 0.3(200,000) + 0.4(10,000) +0.3(3,000) = 64,900 EV
4th Decision Branch (Consolidate existing product, reap without investing)
E(X) = 0.6(10,000) + 0.4(1,000) = 6,400 EV
B.) The decision alternative that has the most favorable total expected value is to develop new product thoroughly with a total expected value of 210,200. 1.) The Company has determined that it has two alternatives for improving profits: develop new products either rapidly or thoroughly, or consolidate existing products by strengthening products or reaping without investing. On the first branch of the decision tree we know that the decision to develop thoroughly has a probability of 0.4 in a good market and predicted gains of $500,000. The second State of nature would be a moderate market reaction with a probability of .4 and predicted gains of $25,000. The third state of nature is a poor market reaction with a probability of .2 with predicted gains of $1,000. The expected monetary value (EMV) is determined by multiplying the probability in each state of nature by the predicted gains and then adding sums of each state of nature. The EMV (Developing thoroughly) =.4(500,000) +.4(25,000) +.2(1,000) =210,200
The second branch of the decision tree we know that the decision to develop rapidly has a probability of 0.1 in a good market reaction with predicted gains of $500,000. The second state of nature is a moderate market reaction with a probability of .2 and predicted gains of $25,000. The third state of nature is a poor reaction with a probability of .7 with predicted gains of $1,000. The EMV (Developing Rapidly) = .1(500,000) +.2(25,000) +.7(1,000) =55,700
The third branch of the decision