A small firm has developed a new machine to manufacture steel canisters. The machine is a considerable improvement over the ones currently available in the market in terms of size and noise suppression. If the company’s management decides to manufacture this new machine, it is almost certain that the larger firms in the industry will copy the design and take the majority of the market through price competition. As such, management is also considering the possibility of entering into a partnership agreement with one of the larger firms on a 50-50 arrangement on profit and cost distribution to minimize their exposure or simply selling the design for the new machine to one of the larger firms for P10,000,000. Management feels that the decision depends mostly on expected profit in the first year of production if they pursue the manufacturing of the machine. The costs of setting up the production lines and marketing the new machine are estimated to be P25,000,000. The variable cost of the machine is about P1,000,000 per machine, and the firm plans to sell the machine for P1,500,000. To simplify the analysis, the company is assuming that there will be no demand or that the market demand will be either 50 or 75 machines.
What would be the investment choices given the following criteria:
- Maximin
- Maximax
- Minimax regret
What would be the investment choice if each state of nature would be given an equal probability of occurrence?