Determine the expected payoff for each decision

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Reference no: EM13251855

SimCon, Inc., a smart tag manufacturer, is investigating the possibility of producing and marketing a new RFID tag. Undertaking this project will require either purchasing a sophisticated IT system or hiring and training several additional engineers. The market for the product could be either favorable or unfavorable. SimCon, Inc., of course, has the option of not developing the new product at all.

With favorable acceptance by the market, sales would be 25,000 tags selling for $100 each. With unfavorable acceptance, sales would be only 8,000 tags selling for $100 each. The cost of IT equipment is $500,000, but that of hiring and training three new engineers is only $375,000. However, manufacturing costs should drop from $50 each with manufacturing without the IT system, to $40 each when manufacturing with IT.

The probability of favorable acceptance of the new smart tag is 0.40; the probability of unfavorable acceptance is 0.60.

Draw a decision tree. Then analyze it to determine the expected payoff for each decision and event node. Which alternative (purchasing the IT system, hiring engineers) has the better expected payoff?

Reference no: EM13251855

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