ET (Extra Terrestrial) Systems has developed a new computer chip that will enable it begin producing a
Question:
ET (Extra Terrestrial) Systems has developed a new computer chip that will enable it begin producing a new generation of PCs if it so desires. Alternatively, it can try to sell the rights to the computer chip. If the company decides to build computers, the profitability of the venture depends on the company's ability to market it during the first year. There are two competing estimates of outcomes. One possible outcome is to sell 10,000 computers (60% probability), the other is to sell 55,000 computers (40% probability) assuming that it catches on. The cost of setting up the assembly line is $6 million. The profit margin (excluding the fixed cost) is estimated to be $450 per computer.
If the company decides to sell the rights to the chip, they can either auction it (sell to highest bidder) or try to sell the rights at a fixed price. If they decide to auction it they estimate the revenue from the sale could be $15 million or $10 million or $3.5 million with 20%, 50%, and 30% probability, respectively. The auction process will cost the firm $275,000.
However, if they decide to sell it for a fixed price of $12,000,000 then they estimate that there is a 25% chance that it may not be sold at all.
Develop a decision tree for this problem
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman