What is the expected payoff of launching the pilot

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Reference no: EM131958040

Question: A company is considering rolling out a new manufacturing process for its product. It must decide if it wants to move ahead with a full scale roll out, or first conduct a pilot. The cost of a full scale build is $40 million. If the project is successful (p=40%) the company earns $200M, less the $40M investment for a $160M net. If the project fails, they salvage the equipment for $25M and a net loss of $15M. The cost of a pilot is $10M. They believe the probability of success with the pilot is 50%. If the pilot fails they shut down the project and write off the $10M. If the pilot is successful they may still chose to shut down, or they may choose to expand at an additional cost of $35M. If the expansion is successful they earn $220M, less $45M investment for a net of $175M.If it fails they can recoup $10M for a net loss of $35M. The process is summarized in in the attached tree diagram. What is the expected payoff of launching the pilot?

Reference no: EM131958040

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