Reference no: EM132693280

A company has already spent $100,000 developing a new electronic gauge and is now considering whether to market it. Tooling for production would cost $80,000. If the gauge is produced and marketed, the company estimated that there is only one chance in fiver that the gauge would be successful. If successful, the net cash inflows would be $120,000 per year for 8 years. If not successful, the net cash inflows would be $40,000 for 2 years, after which time the venture would be terminated. The MARR is 12% per year.

a. Draw a decision tree and determine the better alternative using the EMV criterion based on present worth.

b. Suppose the market research group can make a market survey that with probability 0.9 will predict a success if the gauge will turn out to be a success and with probability 0.85 will predict failure if the gauge will turn out to be unsuccessful. Should the survey be undertaken first? What is the expected value of the survey to the company? If the survey will produce perfect predictions (i.e. both probabilities above are 1), how much such a perfect survey will be worth to the company now?