Find the expected value using tree diagram

Reference no: EM1316068

ING's General Counsel has just learned that Delco has filed two patent infringement suits against ING's Automotive Components Division. The first suit will be held in Federal District Court in Alexandria in 3 months and the second is scheduled in 6 months in New York. Our GC estimates that the first trial will take no longer than six months to complete. In both cases ING has the option to either settle the case out of court or proceed to trial. Preparing to try either suit alone will cost $75,000 but much of the legal preparation on the first suit will help on the second so the cost of preparing for both suits will be $120,000. The GC estimates that it will cost ING $750,000 to settle the first suit out of court and $450,000 to settle the second one; of course, settling out of court enables ING to avoid the cost of preparing for the suits. If the suits precede to trial and ING wins then there are no other costs, but losing the first trial will result in additional costs of $1,500,000 and losing the second will result in additional costs of $900,000. The GC believes that ING has a 60% chance of winning the first suit. The chance of winning the second suit depends on the outcome of the first: 40% if the first suit is settled out of court, 80% if it is tried, and 10% if it is tried and lost.

a) Draw the decision tree for deciding how to proceed.

b) What should ING's General Counsel do to minimize ING's expected costs?

Reference no: EM1316068

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