To determine which decision alternative to choose using the Expected Value (EV) method, we need to calculate the expected value for each alternative based on the given probabilities and outcomes.
Given Data
Outcomes and Probabilities:
- Success: Probability = 0.1
- Moderate Success: Probability = 0.3
- Neutral: Probability = 0.4
- Failure: Probability = 1 - (0.1 + 0.3 + 0.4) = 0.2
Decision Alternatives and Outcomes
-
Sell Company:
- Success: 72
- Moderate Success: 72
- Neutral: 72
- Failure: 72
-
Form Joint Venture:
- Success: 210
- Moderate Success: 180
- Neutral: 120
- Failure: 117
-
Sell Software on Own:
- Success: 420
- Moderate Success: 250
- Neutral: 214
- Failure: -100
Expected Value Calculation
1. Sell Company EV: \[ EV_{sell\ company} = (0.1 \times 72) + (0.3 \times 72) + (0.4 \times 72) + (0.2 \times 72) \] \[ = 7.2 + 21.6 + 28.8 + 14.4 = 72 \]
2. Form Joint Venture EV: \[ EV_{joint\ venture} = (0.1 \times 210) + (0.3 \times 180) + (0.4 \times 120) + (0.2 \times 117) \] \[ = 21 + 54 + 48 + 23.4 = 146.4 \]
3. Sell Software on Own EV: \[ EV_{sell\ software} = (0.1 \times 420) + (0.3 \times 250) + (0.4 \times 214) + (0.2 \times -100) \] \[ = 42 + 75 + 85.6 - 20 = 182.6 \]
Summary of Expected Values
- Sell Company EV: 72
- Form Joint Venture EV: 146.4
- Sell Software on Own EV: 182.6
Decision
Based on the expected values calculated, the best decision alternative is to Sell Software on Own, as it has the highest expected value of 182.6.