What returns should the company expect to receive

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Reference no: EM131820690

A company has formalized a new-product concept and must now decide whether to provide for long-range production capacity in its five year plan.

The company has three opportunities for profiting from the new product: sell the idea outright now to another company, lease the concept for a royalty, or develop the product in-house.

If the concept is sold outright, it will bring $1,500,000. A consulting firm has surveyed the potential markets for the idea. If the concept is leased for royalty, two companies have submitted proposals and this information applies:

Size of Market	Probability	Payoffs
Company A
Large	0.5	$2,800,000
Marginal	0.5	2,200,000
Company B
Large	0.5	$2,600,000
Marginal	0.5	2,300,000

If the company develops the concept into a new product, it can sell the rights out to the product. If this alternative is selected this information applies:

Size of Market	Probability	Payoffs
Large	0.5	$2,500,00
Marginal	0.5	2,200,000

If the company develops the new product and then produces and markets it, this information applies:

Size of Market	Probability	Payoffs
Large	0.5	$3,000,000
Marginal	0.5	1,800,000

Use a decision tree analysis and recommend a course of action for this new product idea.

If the company follows your recommendation, what returns should the company expect to receive?

Reference no: EM131820690

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