Alula Software Solutions, Inc. (ASS) has been investigating the possibility of developing a simulation software that can be used for analyzing risk and return from alternative lines of investment. The company is currently trying to decide between four proposed versions of the software: Basic (BS), Moderately Advanced (MAS), Advanced (AS), and Highly Advanced (HAS) versions of the software at respective development costs of $200,000, $350,000, $550,000, and $800,000. • If the performance of the prototype developed by ASS is better than existing software (a success), ASS believes that it could sell the rights to its simulation software to a larger software developer for $300,000, $500,000, $750,000, and $1,200,000 for the BS, MAS, AS, and HAS versions, respectively. • If the performance of the prototype developed by ASS, does not exceed the performance of the existing software (a failure), ASS believes that it could still sell the rights to its simulation software to a larger software developer for $200,000, $300,000, $400,000, and $500,000 for BS, MAS, AS, and HAS versions, respectively. • ASS estimates that the probability of a success for the software is 60%.
Please summarize the estimated net profit from each version of the proposed software under each state of nature using the following table. Assume that there are no anticipated costs or revenues associated with the software except those reported above.
State of Nature Success Failure BS Decision Alternative MAS AS HAS Probability
What decision would maximize expected profit (EMV) for ASS? Show the necessary steps.
What is the maximum amount ASS should be willing to pay for a perfect forecast of success or failure for their software? Show the necessary steps.