Dan Reid, chief engineer at New Hampshire Chemical, Inc., has to decide whether

Question

Dan Reid, chief engineer at New Hampshire Chemical, Inc., has to decide whether to build a new state-of-art processing facility. If the new facility works, the company y could realize a profit of $200,000. If it fails, New Hampshire Chemical could lose $150,000. At this time, Reid estimates a 60% chance that the new process will fail. The other option is to build a pilot plant and then decide whether to build a complete facility. The pilot plant would cost $10,000 to build. Reid estimates a fifty-fifty chance that the pilot plant will work. If the pilot plant works, there is a 90% probability that the complete plant, if it is built, will also work. If the pilot plant does not work, there is only a 20% chance that the complete project (if it is constructed) will work. Reid faces a dilemma. Should he build the plant? Should he build the pilot project and then make a decision? Help Reid by analyzing this problem.

Explanation / Answer

first he should go with pilot project, which cost $10,000 and it gives clear idea whether it can accept or not.

if he fails in the pilot project, then he can reject the project and the lose will be only $10,000.

if he succeeded the pilot project, then he can accept the new project and the chances to completely successfully is 90%.

if he directly goes with the main project, the chances to fialure are higher than chances to succeed.

so, my suggestion is go with pilot project and if it works you can proceed with the project, otherwise reject the project.

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