Complete the following decision tree problem. You have been hired as an operations analyst for a start-up company.
The company has a new drug that will greatly reduce the risk of heart disease, but requires FDA approval before it can be sold.
The administrative costs to manage the FDA approval process are $200,000, while if the company chooses to forgo the application, it can sell the patent for the unapproved product for $50,000.
The company's regulatory expert estimates the probability of FDA approval at 80%. If the product is approved by the FDA, the company can sell the patent immediately for $500,000 or it can choose to market the product.
If it chooses to market the product, it faces an uncertainty regarding Obama's healthcare initiative.
If Obama's healthcare initiative is successful at reducing chronic disease through preventative care, then the profits for the drug will be $100,000.
If the initiative is not successful, then the company's profits will be $1,000,000. The probability of the initiative being successful is estimated at 25%.
Your answer should include the tree diagram, nodes, probability labels, and a recommendation of what the company should do using EMV as the decision method.