Purchase Solution

Calculating EMV, and maximizing EMV from a few alternatives

Not what you're looking for?

Ask Custom Question

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.

Attachments
Purchase this Solution

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.

Solution Preview

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 ...

Purchase this Solution


Free BrainMass Quizzes
Measures of Central Tendency

This quiz evaluates the students understanding of the measures of central tendency seen in statistics. This quiz is specifically designed to incorporate the measures of central tendency as they relate to psychological research.

Terms and Definitions for Statistics

This quiz covers basic terms and definitions of statistics.

Measures of Central Tendency

Tests knowledge of the three main measures of central tendency, including some simple calculation questions.

Know Your Statistical Concepts

Each question is a choice-summary multiple choice question that presents you with a statistical concept and then 4 numbered statements. You must decide which (if any) of the numbered statements is/are true as they relate to the statistical concept.