WestCom Systems Products Company develops computer systems and software products for commercial sale.
Each year it considers and evaluates a number of different R&D projects to undertake. It develops a road map for each project, in the form of a standardized decision tree that identifies the different decision points in the R&D process from the initial decision to invest in a project's development through the actual commercialization of the final product.
The first decision point in the R&D process is whether to fund a proposed project for 1 year. If the decision is no, then there is no resulting cost; if the decision is yes, then the project proceeds at an incremental cost to the company.
The company establishes specific short-term, early technical milestones for its projects after 1 year. If the early milestones are achieved, the project proceeds to the next phase of project development; if the milestones are not achieved, the project is abandoned. In its planning process, the company develops probability estimates of achieving and not achieving the early milestones. If the early milestones are achieved, the project is funded for further development during an extended time frame specific to a project. At the end of this time frame, a project is evaluated according to a second set of (later) technical milestones. Again, the company attaches probability estimates for achieving and not achieving these later milestones. If the later milestones are not achieved, the project is abandoned.
The following table provides the various costs, event probabilities, and investment outcomes for five projects the company is considering:

Determine the expected value for each project and then rank the projects accordingly for the company toconsider.

  • CreatedJuly 17, 2014
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