DA Corp is a smart audio equipment manufacturer. The company has to decide if it should invest in developing a new product to be launched by the second half of 2019. The project requires an initial investment of either $1 million or $2 million in January 2019. However, the company does not know whether the product could be completed by June 2019 or not. The company believes that, if it invests $1 million in January 2019, the product will be completed in June 2019 with probability 0.6; if it invests $2 million instead, the product will be completed in June 2019 with probability 0.8.
If the product is not completed by June 2019, DA has the option to either invest another $2 million to continue the project or to terminate the project. If it does invest $2 million in June 2019, it will certainly finish the product by October 2019.
DA Corp has a competitor, Cyber Inc., who is working on a competing product. DAbelieves that Cyber is equally likely to finish its producteither by June 2019 or October 2019. DA will know with certainty in June 2019 whether Cyber has finished its product at that time or not.
If the two companies finish their products at the same time, they will each make $10million profits from marketing and sales. Otherwise, the one who finishes first will make $4 million profits from marketing and sales, and the one who finishes later will make only $1 million from marketing and sales. If a company does not finish a product, it will not make any profit.
Assume DA Corp is risk neutral. Ignores the effects of any time value of money in your analysis.
You may use computer software (treeplan and others) for your computations but you must show your workings in the submission.
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