Pray Industries is considering a $5 million research and development (R&D) project. Profit projections appear promising, but Pray's president, JJ, is concerned because the probability that the R&D project will be successful is only 0.50. Furthermore, JJ knows that even if the project is successful, it will require that the company build a new production facility at a cost of $20 million in order to manufacture the product line. If the facility is built, uncertainty about the profit to be expected: high demand $59 million in revenue, medium demand $45 million in revenue, low demand $35 in revenue. Another option is that if the R&D project is successful, the company could sell the rights to the product for an estimated $25 million.

Measure the Expected Monetary Value for each demand state, the EMV based on profit (not revenue) for each of the 4 nodes (A, B, 1, 2).

High Demand p(High) EMV High Build Facility B Medium Demand p(Medium) EMV Med Successful p(Sussessful) 2 Low Demand p(Low) EMV Low Start R&D Project Sell Rights A EMV Selt 1 Not Successful p(Not Successful) EMVNS Do Not Start R&D Project EMVONS Node Probability of the event Value Node Place "X" in proper course of action 1 A Start R&D Project & Build the Facility Start R&D Project & Sell the Rights Do Not Start R&D Faciity EMV DNS If more than one option is optimal mark each EMVNS B Place value to nearest $ EMV Sell What is the Expected Value of your Decision? EMV High EMV Med EMV LOW