Question

Using the EV method, which decision alternative will you chose? a) Sell company b) Form Joint Venture c) Sell software on own
Success Moderate Success Neutral Failure
Probability 0.1 0.3 0.4
Sell Company 76 76
76 76
Form Joint Venture 210 180 120 112
Sell Software on own 420 250 200 -100

Answer 1

First check the probabilities sum to 1: 0.1 + 0.3 + 0.4 = 0.8, so I assume Failure probability = 0.2.

Compute expected value (EV) for each alternative:

- Sell company: EV = 0.1(76) + 0.3(76) + 0.4(76) + 0.2(76) = 76

- Form joint venture: EV = 0.1(210) + 0.3(180) + 0.4(120) + 0.2(112)
= 21 + 54 + 48 + 22.4 = 145.4

- Sell software on own: EV = 0.1(420) + 0.3(250) + 0.4(200) + 0.2(−100)
= 42 + 75 + 80 − 20 = 177

Highest EV = 177 for "Sell software on own." So, by the EV criterion, choose: Sell software on own.

(Note: EV ignores risk preferences; if you prefer less risk you might choose differently.)