Simcoe Virtual Technologies Group $($SVT$)$ has developed a new VR technology to display movies at

homes. Focus group subjects who experienced the new technology first hand reported that they felt as if

they actually participated in the movie.

The company has to decide when to introduce the new product to the market and in what scale. Future is

of course uncertain, and SVT$$s current production capacity is limited$.$ The company is considering the

following two alternatives:

The first alternative is to build immediately a factory with a capacity of $1,000,000$ units a year and sell the

new product nationwide. It requires an investment of $$30,000,000.$ SVT estimates that the demand will be

high with probability $0\mathrm{.}3$ and low with $0\mathrm{.}7.$ If the demand turns out to be high, the company will be able

to sell $1,000,000$ units per year for the next two years. If the demand turns out to be low, the company

will be able to sell only $20,000$ units per year for the next two years. Due to the fast$-$moving nature of the

technology industry, this product can sell only for two years. At the end of the second year, the factory

will have zero salvage value.

Page $4$ of $4$

The second alternative is to test$-$market the product in the GTA market. SVT$$s current production facilities

have the capacity to serve this market, so no investment is required to build a factory. SVT$$s estimation

of high customer demand is $0\mathrm{.}3$ and low demand $0\mathrm{.}7$ in the GTA market.

If the customer response in GTA is high, the company will sell $15,000$ units during the first year. Rather

picky GTA customers$$ favorable response guarantees a success of the new technology in the national

market. Therefore, at the beginning of the second year, SVT will invest in production facilities, which

requires $$30,000,000,$ to introduce the product nationwide. The new factory has a capacity of $1,000,000.$

Nationwide demand during the second year will be $1,000,000$ units.

If the response in GTA is low, the company will sell only $5,000$ units during the first year. Due to the low

response in GTA, SVT will not introduce the new product nationally. GTA demand in the second year

will remain $5,000$ units.

Assume that the profit margin is $$50$ per unit.

$($a$)$ If SVT does not test the market, what is the company$$s expected profit?

$($b$)$ Based on current information only, should SVT test$-$market in GTA?

Suppose that SVT hires a market research expert to perform to predict the demand for the product.

$($c$)$ At most how much should SVT pay for the expert$$s prediction?

SVT believes that when the demand for the product turns out to be high, there is a $75\%$ chance that the

market research expert would have predicted $$high demand$$; when the demand for the product turns out

to be low, there is an $85\%$ that the expert would have predicted $$low demand.$$

$($d$)$ Based on the above information, at most how much should SVT pay for the expert$$s prediction?

Submit a $12$ page non$-$technical consulting report $($approximately one short paragraph for each subproblem$)$ accompanied by a technical appendix $($either an Excel file with your decision tree or a scanned

copy of a legibly handwritten decision tree$).$ The report should highlight your findings $($e$.$g$.,$ business

implications$)$ and be prepared as if to be presented to an audience that has little knowledge of

quantitative models.