Reference no: EM133448693

Draw a decision tree to solve the following problem: Steve Hinton, the owner of COM-TECH, a small communications research firm located just outside of Raleigh, North Carolina, is trying to develop a design for using wireless communication technology to enhance the safety of the coal-mining industry. Upon successful development of this design, he would be able to sell it to the Occupational Safety and Health Administration (OSHA) at a price of $85,000. Steve would need to decide to use one of the three available communication technologies: microwave, cellular, or infrared. He has some experience in all three areas but would need to acquire some new equipment depending on which technology is used. The cost of equipment needed for each technology is summarized as: Technology Equipment Cost Microwave $4,000 Cellular $5,000 Infrared $4,000 In addition to the equipment cost, Steve knows he will spend money on research and development (R&D) to carry out the design development, but he does not know exactly what the R&D costs will be. For simplicity, Steve estimates the following best-case and worst-case R&D costs associated with using each technology, and he assigns probabilities to each outcome based on his degree of expertise in each area. Possible R&D Costs Best Case Worst Case Cost Probability Cost Probability Microwave $30,000 0.4 $60,000 0.6 Cellular $40,000 0.8 $70,000 0.2 Infrared $40,000 0.9 $80,000 0.1.

1. What is the best course of decision for Steve in this problem?

2. What is the expected profit for this best course of action?

3. What is the expected value of perfect information? (This part is optional and for extra credit)