What is the optimal strategy

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The CEO of a biotech company must decide whether to spend $2 million to continue with a particular research project or to stop the development. The success of the project (as measured by obtaining a patent) is not assured. At this point the CEO judges only a 70% chance of getting the patent. If the patent is awarded, the company can either license the patent for an estimated profit of $25 million or invest an additional $12 million to create a production and marketing system to sell the product directly. If the CEO chooses the latter, he/she faces uncertainty of demand and associated profit from sales as following;

Demand level Probability Profit from sales

High 0.25 $55 million

Medium 0.55 $33 million

Low 0.2 $15 million

a) Draw the decision tree

b) Using the EMV rule, what is the optimal strategy? What is the EMV for this strategy?

Reference no: EM132691531

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