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Analysis and Decision Tree

Techware Incorporated is considering the introduction of two new software products to the market. In particular, the company has four options regarding these two proposed products: introduce neither product, introduce product 1 only, introduce product 2 only, or introduce both products. Research and development costs for products 1 and 2 are $180,000 and $150,000, respectively. Note that the first option entails no costs because research and developments efforts have not yet begun.

The success of these software products depends on the trend of the national economy in the coming year and on the consumers' reaction to these products. The company's revenues earned by introducing product 1 only, product 2 only, or both products in various states of the national economy are given below. The probabilities of observing a strong, fair, and weak trend in the national economy in the coming year are 0.30, 0.50, and 0.20, respectively.

Revenue table for Techware's decision problem

Trend in national economy
Strong Fair Weak EMV
Introduce neither product $0 $0 $0 $0
Introduce product 1 only $500,000 $260,000 $120,000 $304,000
Introduce product 2 only $420,000 $230,000 $110,000
Introduce both products $820,000 $390,000 $200,000
Probability 0.3 0.5 0.2

a) Calculate the EMV of the two latter alternatives and write results in cells above.
b) Construct a decision tree of the product manager's decision and identify the course of action that maximizes EMV.

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