# Calculating EMV, and maximizing EMV from a few alternatives

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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

Decision

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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##### Solution Summary

A step-by-step solution is provided. Several examples of calculating EMV is presented. A discussion follows on how to select the best alternative from several possible choices, based largely on the EMV's just calculated. Word Doc included.

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Trend in national economy

Strong Fair Weak EMV E-R

Decision

Introduce neither product $0 $0 $0 $0 $0

Introduce product 1 only $500,000 $260,000 $120,000 $304,000 $124,000

Introduce product 2 only $420,000 $230,000 $110,000 $263,000 $113,000

Introduce both products $820,000 $390,000 $200,000 $481,000 $151,000

Probability 0.3 0.5 0.2

So, to calculate the EMV, we multiply each dollar value by the probability of it occurring, and then sum them up. For ...

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