Roberts, Inc. of Hannibal, MO, has the option of (a) proceeding immediately with production of a new laptop that has just completed prototype testing or (b) having the value analysis team complete a study before starting production. If Bob Smith, VP of operations, proceeds with the existing prototype (option a), the firm estimates there is a 0.6 probability they will sale 100,000 units at $600 each and a 0.4 probability of selling 75,000 at $600. If, however, he uses the value analysis team (option b), the firm expects the probability of selling 85,000 units at $750 is 0.5 and there is a 0.5 probability of selling 75,000 units at $600 (delaying the launch will increase both the probability of a poor outcome (40% to 50%) and the potential profit per unit ($600 to $750) from a positive outcome, but decrease the volume from a positive outcome (100,000 to 85,000)). The cost of the value analysis team is $300,000 and is only used for option b. All costs other than the value analysis team are assumed to be equal and can be ignored for this analysis. A. Illustrate Roberts, Inc alternatives and state of natures with a decision tree.
B. What is the EMV of option (a) and option (b)?
C. Which option do you recommend for Roberts, Inc?