Business, 10.12.2019 00:31 firefox1fan

Hemmingway, inc., is considering a $5 million research and development project. profit projections appear promising, but hemmingway's president is concerned because the probability that the r& d project will be succesful is only .50. furthermore, the president knows that even if the project is successful, it will require that the compnay build a new production facility at a cost of $20 million in order to manufacture the product. if the facility is built, uncertainty remains about the demand and thus uncertainty about the profit that will be realized. 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. under this option, the company would not build the $20 million production facility. a. create a decision tree. should the company undertake the r& d project? b. if it does and the r& d project is successful, what should the company do? what is the expected value of following your suggested strategy? c. suppose that the selling rights were higher. how high would they have to be in order to make the company consider selling the rights (again, assume the project has been undertaken and it is successful)?

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