You have to solve the following problem for the CEO of Super Superconductors, Inc. (SSC). She needs the answer in writing by 10:00 PM tonight. SSC makes a superconducting wire that operates at the temperature of liquid nitrogen; it sells about 10,000 kilometers of this product per year.
There are rumors, however, that a competing company (Superconductors R US (SRU)) is producing a wire that super conducts at the temperature of liquid oxygen, which is higher – (90 K vice 77 K), thus it is easier to use. SSC has a project proposed for R&D for a superconductor that works at liquid oxygen temperatures, but it hasn’t produced a material that is profitable to produce.
The CEO thinks that there is a 40% chance that SRU has produced the better superconductor. If SRU has managed to develop the better superconductor, and SSC fails to produce an equivalent product, sales of the existing product will decrease by 50%.
Otherwise, sales stay the same. SSC’s CEO can authorize $50 million to do the R&D project. The R&D project can produce an oxygen temperature superconductor, but it isn’t clear if the result will be an inexpensive product or an expensive one – there is a 50 – 50 chance of either outcome. If the R&D produces an inexpensive superconducting wire, SSC will switch from making the current wire to the new, cheap oxygen temperature wire. If SSC makes the cheap wire and SRU has an oxygen-level superconducting wire also, then SSC’s sales of the new product will be 8,000 km/yr.
If SSC makes the cheap wire and SRU doesn’t have an oxygen-level superconducting wire also, then SSC’s sales of the new product will be 15,000 km/yr. If the R&D can only produce an expensive version, SSC’s CEO will have to decide to make the old product or the new one. If they continue to make the old one, sales will drop 50% if SRU does produce a new oxygen temperature superconductor and stay the same if it doesn’t. However, if SSC makes the new superconductor instead of the old one, sales will be 3,000 km/yr. if SRU does produce a new oxygen temperature superconductor and 7,500 km/yr. if it doesn’t.
Assume that SSC makes $10 /meter (1 km = 1,000 meters) if it sells the old superconducting wire, $18/meter for the inexpensive oxygen temperature superconducting wire, and $7/meter for the expensive oxygen temperature superconducting wire (these are net profits). Assume that the decision will be made based on the first year’s sales (with either the old or new superconducting wire, depending upon the decision). Should SSC’s CEO spend the $50 million on R&D? If she does, should she sell the newer oxygen-level superconducting wire that comes out of R&D?
(1) Draw an influence diagram showing this problem.
(2) Draw a decision tree showing this problem.
(3) Solve either one by hand for the answer.
