Developed a promising new product

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Biltmore manufacturing has developed a promising new product. The firm's management faces three choices: it can sell the idea for the new product to a company for $20,000, it can hire a consultant to study the market and then make a decision, or it can arrange financing for building a factory and then manufacture and market the product. The study will cost Biltmore $10,000, and its management believes that there is about a 50-50 chance that favorable market will be found. If the study is unfavorable, management figures that it can still sell the idea for $12,000. If the study is favorable, it figures that it can sell the idea for $40,000. But even if a favorable market is found, the chance of an ultimately successful product is about 2 out of 5. A successful product will return $500,000. Even with an unfavorable study, a successful product can be expected about once in every ten new-product introductions. If Biltmore's management decides to manufacture the product without a study, it figures there is only a 1-in-4 chance of its being successful. A product failure costs $ 100,000. What should Biltmore do?

Reference no: EM131121603

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