DUMOND INTERNATIONAL, PART \"So that\'s the simplified version of the decision t
ID: 398120 • Letter: D
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DUMOND INTERNATIONAL, PART "So that's the simplified version of the decision tree based on what appear to be the critical issues," Nancy introduced, there was always the question of how well Milnor concluded. "Calculating expected values, it looks as though we should introduce the new product. that Nancy had presented to the board captured these Now, I know that we don't all agree on the numbers in concerns. the tree, so why don't we play around with them a little bit. I've got the data in the computer here. I can make Nancy sat back and relaxed as she listened to the any changes you want and see what effect they have on comments. the expected value." introduction date. And once the product was it would be received. The decision tree (Figure 5.28) The boardroom was beginning to get warm "Well, I'll start," said John Dilts. "I don't have much Nancy had just completed her presentation to thetrouble with the numbers in the top half of the tree. But board of directors of DuMond International, which manufactured agricultural fertilizers and pesticides. The or pinned at 30%. That's high. Personally, I don't think decision the board faced was whether to go ahead with there's more than a 10% chance of an out-and-out ban." a new pesticide product to replace an old one or whether to continue to rely on the current product, ought to be worth $300,000 at least," added Pete which had been around for years and was a good seller. Lillovich. "With a smaller chance of a ban and a higher The problem with the current product was that evidence was beginning to surface that showed that the chemical's use could create substantial health risks, and Jenkins. "I think we have a pretty good handle on there even was some talk of banning the product. The what's going on with the current product. But I'd like new product still required more development, and theto play the new product a little more conservatively. I question was whether all of the development issues could be resolved in time to meet the scheduled you have the chance of banning the current product fixed "Yeah, and even if there were, the current product value, surely we're better off with the old product!" "Well, I don't know about you two," said Marla know that the values at the ends of the branches on the top half of the tree are accounting's best guesses basedExplanation / Answer
1.
Expected Value of decision to go with the New product =0.6*(1.35*0.64+0.85*0.36)+0.4*(1.20*0.57+0.75*0.43) = 1.105
Expected Value of decision to stay with the Current product =0.3*0.2+0.7*1 = 0.76
The Expected Value of the decision to go with the new product is higher as compared to that o the decision to stay with the current product.
Based on the higher EV, Nancy believes that DuMond should go with the new product.
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