Reference no: EM132210134

Magnatree is a large company that has been working on a new product. This product has tremendous potential, but Magnatree must move quickly. They have decided that they will introduce the product in two months and have already started developing their advertising campaign.

They are pretty confident that the product will be a success, with a possibility that it will be a huge success, but also a possibility it will be a failure. They recently found out that another company, Shadycorp, has some unique expertise that could significantly improve the new product. They contacted them and Shadycorp offered to sell their expertise to Magnatree for $6 million. Magnatree needs to make an immediate decision on Shadycorp's offer or it will be too late to investigate the use of the expertise in design of the new product. Without the expertise Magnatree has a 25% chance of making the new product a huge success and 65% chance of it being a "success," otherwise it will be a failure. With Shadycorp's expertise there will be a 45% chance of the new product being a huge success, 40% chance of merely a success and otherwise it will fail.

If the new product is a huge success, their expected revenues are expected to be $50 million. If it is merely a success, the expected revenues are expected to be $20 million, but if it fails it will bring in only $1 million in revenues which is much less than the cost.

Construct an appropriate model to represent this situation. The model should include all decision options. Solve your model showing clearly all calculations. Interpret the results of your model and make the appropriate decision. Make sure to include the expected result ($) of your decision and the value at each node.