Posted: September 16th, 2017

OPRE 3333 Homework 5 Assignment (Fall 2014)

Use Decision Trees and the EV criteria to answer the questions presented after each of the following problem descriptions. There are 120 points available on this assignment.

Problem Statement
Radio Schlock is considering the production of a new consumer product with a five-year product lifetime. A new production facility for this upcoming product will be required. Management must decide whether to build a large facility at an estimated cost of $1,000,000 or a smaller facility for an estimated $600,000.
Preliminary market research indicates as 65% chance of high demand for the product.
High demand for the product is expected to result in a $400,000 per year positive cash flow from a large facility or a $150,000 per year positive cash flow from a smaller facility.
Low demand for the product is expected to result in a $50,000 per year positive cash flow from a smaller facility or a $50,000 per year loss from a large facility. A third option has been suggested: delay the decision while further product development is carried out. If the results of this product development are
favorable, Marketing estimates there is a 90% chance of high demand for the product. In the event of unfavorable results, Marketing estimates there is a 40% chance of high demand. If Management chooses to pursue this additional product development one year’s sales will be lost, although cash flows will otherwise be the same as if the production facility had been built immediately.
If the results of the further product development are unfavorable, Management has the option of shelving the project. It is assumed that there is a 50% chance of favorable results from the further product development.
Use the total, undiscounted, cash flow in all calculations rather than NPV.
Be prepared to answer the questions in the eLearning assessment.

(a) What is the EV for the Large production facility?
10 points Question 2(b) What is the EV for the Small production facility?
10 points Question 3(c) What is the EV for further product Development?
10 points Question 4(d) Which option should be chosen? Small. Large. Development.10 points Question 5(e) If results of further product development are favorable, what is the overall project EV at that point?
10 points Question 6(f) If results of further product development are favorable, what is the EV for the large production facility at that point?
10 points Question 7(g) If results of further product development are favorable, what is the EV for the smaller production facility at that point?
10 points Question 8(h) If results of further product development are unfavorable, what is the overall project EV at that point?
10 points Question 9(i) If results of further product development are unfavorable, what is the EV for the large production facility at that point?
10 points Question 10(j) If results of further product development are unfavorable, what is the EV for the smaller production facility at that point?
10 points Question 11(k) If results of further product development are unfavorable, what is the EV for the shelved project at that point?
10 points Question 12(l) What is the probability value of a Favorable outcome for Development necessary for indifference between the Large option and the Developement option? (List the value or type -1)
10 points Question 13(m) Going from Development through Favorable outcome and through facility size to Demand (High or Low), what is the probability value of High Demand necessary for indifference between the Large option and the Development option? (List the value or type -1)
10 points Save and Submit