DECISION TREE ANALYSIS

Your management has asked you to provide an analysis to support their strategic planning effort. They are considering launching one of two possible new products, a lead filter system for drinking water for an entire house, or just at the faucet. The market for each product is known if the products can be successfully developed. However, there is some chance that it will not be possible to successfully develop them.
Revenue of $1,000,000 would be realized from selling the whole house filter system and revenue of $400,000 would be realized from selling the faucet only system. Both of these amounts are net of production cost but do not include development cost.
If development is unsuccessful for a product, then there will be no sales, and the development cost will be totally lost. Development cost would be $100,000 for the whole house system and $10,000 for the faucet only system. The probability of development success is 0.5 for the whole house system and 0.8 for the faucet only system. Provide an analysis to back-up your recommendation. USE DECISION TREE METHOD TO SOLVE THE QUESTION

Leave a Reply