A company has formalized a new-product concept and must now decide whether to provide for long-range production capacity in its five year plan.
The company has three opportunities for profiting from the new product: sell the idea outright now to another company, lease the concept for a royalty, or develop the product in-house.
If the concept is sold outright, it will bring $1,500,000. A consulting firm has surveyed the potential markets for the idea. If the concept is leased for royalty, two companies have submitted proposals and this information applies:
|
Size of Market
|
Probability
|
Payoffs
|
|
Company A
|
|
|
|
Large
|
0.5
|
$2,800,000
|
|
Marginal
|
0.5
|
2,200,000
|
|
Company B
|
|
|
|
Large
|
0.5
|
$2,600,000
|
|
Marginal
|
0.5
|
2,300,000
|
If the company develops the concept into a new product, it can sell the rights out to the product. If this alternative is selected this information applies:
|
Size of Market
|
Probability
|
Payoffs
|
|
Large
|
0.5
|
$2,500,00
|
|
Marginal
|
0.5
|
2,200,000
|
If the company develops the new product and then produces and markets it, this information applies:
|
Size of Market
|
Probability
|
Payoffs
|
|
Large
|
0.5
|
$3,000,000
|
|
Marginal
|
0.5
|
1,800,000
|
Use a decision tree analysis and recommend a course of action for this new product idea.
If the company follows your recommendation, what returns should the company expect to receive?