Case study: BMAC Research & Development decision

BMAC, a research and development (R & D) company, must decide whether to spend $2 million to continue with a particular drug development research project. The success of the project (as measured by obtaining a patent) is not assured, and at this point the decision-maker judges only a 65% chance of getting the patent. If the patent is awarded, the company can either license the patent for an estimated $25 million or invest an additional $10 million to create a production and marketing system to sell the product directly. If the company chooses the latter, it faces uncertainty of demand (categorized as high, medium or low demand) and associated profit from sales. The probabilities of the three levels of demand and associated revenues are summarized on the Table below.

Probability Revenue ($ Millions)

Demand: High 0.2 55

Demand: Medium 0.5 33

Demand: Low 0.3 15

1. What were the fundamental objectives ofBMAC in their decision problem
2. Constructan influence diagram to represent BMAC's decision problem
3. Constructa decision tree to represent BMAC's decision problem
4. Reflecton the roles that the two diagrams play in helping to understand /clarify and communicate the structure of BMAC's decision problem?
5. Give atleast one example from your work and/or from your reading of the academic literature (published journal articles) in which influence diagrams and/or decision trees may be/have been applied to a decision problem. Provide appropriate references in Harvard referencing format.

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