A company has developed a new process that will enable it to begin producing and marketing a new product if it so desires. Alternatively, it can sell the rights to the new process for $15 million. If the company chooses to produce the new product, the profitability of the venture depends upon the company’s ability to market the product during the first year. It has sufficient access to retail outlets that it can guarantee sales of 10,000 units. On the other hand, if this product catches on, the company can sell 100,000 units. For analysis purposes, these two levels of sales are taken to be the two possible outcomes of marketing the product, and are assumed to be equally likely (i.e. the prior probabilities of the two levels of sales are both 0.5). The cost of setting up the assembly line is $6 million. The difference between the selling price and the variable cost of each unit of product is $600.

(a)(4 marks)

Develop a decision analysis formulation of this problem by identifying the decision alternatives, the states of nature, and the payoff table.

(b)2 marks

What is the best alternative under the optimistic approach?

(Show your calculations)

(a)(2 marks)

What is the best alternative under the conservative approach?

(Show your calculations)

(b)(3 marks)

Use the minmax regret approach to find the best alternative.

(Show your calculations)

(c)3 marks

What is the best alternative, if the expected value approach is used?

(Show your steps)

(d)3 marks

Calculate the value of perfect information (EVPI).