2.4 Add a sequential decision

Consider the following information, which continues the Really Big Ideas decision scenario.

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Vice President Adam Smith of Really Big Ideas, Inc. calls you the following day. He reports that the company has learned new information that may affect the decision. Smith wants to know if you can prepare a new analysis using the new information. Smith tells you that the proposed smoke and fire detector must pass an Underwriters Laboratories (UL) safety certification before it can be sold. (Such certification is not necessary for the motion detector.) Director Samiksha Singh has interviewed a UL inspector and learned how the certification process works. Singh has modified the marketing and success estimates based on the new information. She now reports the following:
  • A commercial grade certification will result in $1,000,000 sales (as originally expected). However, the likelihood of obtaining the coveted commercial certification is only 30% due to the stringent standard.
  • A less-stringent residential grade certification is 60% likely, but would result in only $800,000 sales.
  • There is a 10% chance that the smoke and fire detector will not pass any certification test. In this case—a complete failure—the company will lose the initial $100,000 investment cost.
  • Underwriters Laboratories charges a $5,000 non-refundable fee for the certification application.

Your task is to construct and then evaluate a new decision tree based on this new information.

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