NuWave electronics currently produces digital watches. However, they are considering expanding into one of two other product markets: (i) smart watches or (ii) digital music players. They have completed some preliminary market tests to confirm that a market exists for both products. If the smart watches are successfully developed, the company projects revenues of $600,000 over the next five years. If the digital music players are successfully developed, the company projects revenues of $500,000 over the next five years. Since both products are very different from NuWave’s current products, the company may not be able to successfully complete the product development process. The smart watch is a breakthrough product which will require significant research and development (R&D) investments. There is only a 5% chance that the development of the smart watch will be successful. The company estimates that product development cost for the smart watch will be $100,000. However, the digital music players will only cost $10,000 of research and development (R&D) investments. There is an 80% chance that the development of the digital music player will be successful. For both new products, if the NPD process is not successful, then NuWave will realize $0 in revenues.

If the product development of either of these products is successful, then NuWave will discontinue sales of the digital watches. If they the development of either new products is a failure, they will discontinue that product and continue to produce digital watches at current output levels, which is predicted to yield $225,000 in annual profits for the next five years. In this case, development cost will have to deducted from the profits generated by the production of digital watches.

a. Using Optimistic Criterion Only, NuWave should chose decision alternative
b. Using Pessimistic Criterion Only, NuWave should chose decision alternative
c. Using Expected Value Criterion Only, NuWave should chose decision alternative