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Exercises 165
other elements of the problem remain the same, determine how
low this probability would have to be before the option of not
developing the product should be chosen.
(d) Before the final decision is made the company is taken over
by a new owner, who has the utilities shown below for the
sums of money involved in the decision. (The owner has no
interest in other attributes which may be associated with the
decision such as developing a prestige product or maintaining
employment.) What implications does this have for the policy
that you identified in (b) and why?
Present value of
net returns
New owner’s
utility
−$3m 0
$0m 0.6
$1m 0.75
$2m 0.85
$4m 0.95
$6m 1.0
(2) A large machine in a factory has broken down and the company that
owns the factory will incur costs of $3200 for each day the machine
is out of action. The factory’s engineer has three immediate options:
Option 1
He can return the machine to the supplier who has agreed to
collect, repair and return it free of charge, but not to compensate the
company for any losses they might incur while the repair is being
carried out. The supplier will not agree to repair the machine if any
other person has previously attempted to repair it. If the machine is
returned, the supplier will guarantee to return it in working order
in 10 days’ time.
Option 2
He can call in a specialist local engineering company. They will
charge $20 000 to carry out the repair and they estimate that there is
a 30% chance that they will be able to return the machine to working
order in 2 days. There is, however, a 70% chance that repairs will
take 4 days.
Option 3
He can attempt to carry out the repair work himself, and he
estimates that there is a 50% chance that he could mend the