Castle is a large company that has been working on a new product. This product has tremendous potential, but Castle must move quickly. They have decided that they will introduce the product in two months and have already started developing their advertising campaign.
They are sure that the product will be a success, with a possibility that it will be a huge success. They recently found out that another company, Flexcorp, has some unique expertise that could significantly improve the new product. They contacted them and Flexcorp offered to sell their expertise to Castle for $5 million. Castle needs to make an immediate decision on Flexcorp’s offer or it will be too late to investigate the use of the expertise in design of the new product. Without the expertise Castle has a 20% chance of making the new product a huge success. With Flexcorp’s expertise there will be a 40% chance of the new product being a huge success.
If the new product is a huge success, their expected revenues are expected to be $50 million. If it is merely a success, the expected revenues are expected to be $20 million.
Construct an appropriate model to represent this situation. The model should include all decision options. Solve your model showing clearly all calculations. Interpret the results of your model and make the appropriate decision. Make sure to include the expected result ($) of your decision and the value at each node.