Practical Management Science 4th ed

Winston - Albright

Chapter 9 problem 40

TechwareInc 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.

R&D costs for products 1 and 2 are $180,000 and $150,000 respectively. Note that the first option entails no costs because R&D 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 in the attached spreadsheet. The probabilities of observing a strong, fair, or weak trend in the national economy in the coming year are assessed to be 0.30, 0.50, and 0.20, respectively.

a. Create a payoff table that specifies Techware’s net revenue (in dollars) for each possible decision and each outcome with respect to the trend in the national economy.

b. Use PrecisionTree to identify the strategy that maximizes Techware’s expected net revenue from the given marketing opportunities.

c. Perform a sensitivity analysis on the optimal decision, letting each of the inputs vary one at a time plus or minus 25% from its base value, and summarize your findings. In response to which model inputs is the expected net revenue value most sensitive?



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