The R&D manager of the Beck Company is trying to decide whether or not to fund a
Question:
The R&D manager of the Beck Company is trying to decide whether or not to fund a project to develop a new lubricant. It is assumed that the project will be a major technical success, a minor technical success, or a failure. The company estimates the value of a major technical success as $150,000, since the lubricant could be used in a number of products the company is making. If the project is a minor technical success, its value is estimated as $10,000, since Beck feels the knowledge gained will benefit some other ongoing projects. If the project is a failure, it will cost the company $100,000. Based on the opinion of the scientists involved and the manager's own subjective assessment, the following probabilities are assigned:
P (major success) = .15
P (minor success) = .45
P (failure) = .40
a. According to the EV criterion, should the project be funded?
b. Suppose a group of expert scientists from a research institute could be hired as consultants to study the project and make a recommendation. If this study would cost $30,000, should the Beck Company hire the consultants?
Step by Step Answer:
OM4 operations management
ISBN: 978-1133372424
4th edition
Authors: David Alan Collier, James R. Evans