New Age is a large company that has been working on a new product. This product has tremendous potential, but New Age must move quickly. They have decided that they will introduce the product in two months and have already started developing their advertising campaign.
They are sure that the product will be a success, with a possibility that it will be a huge success. They recently found out that another company, Innovation, has some unique expertise that could significantly improve the new product. They contacted them and Innovation offered to sell their expertise to New Age for $4 million. New Age needs to make an immediate decision on Innovation's offer or it will be too late to investigate the use of the expertise in design of the new product. Without the expertise New Age has a 30% chance of making the new product a huge success. With Innovation's expertise there will be a 40% chance of the new product being a huge success.
If the new product is a huge success, the estimated future value is expected to be $40 million. If it is merely a success, the estimated future value is expected to be $20 million.
(a) Construct a decision tree and solve the tree
(b) Should New Age accept Innovation's offer? Why?
(c) Provide critical thinking on New Age's decision