A European consortium has spent a considerable amount of time and money developing a new supersonic aircraft. The aircraft gets high marks on all performance measures except noise. In fact, because of the noise, the consortium’s management is concerned that the U.S. government may impose restrictions on some of the American airports where the aircraft can land. Management judges a 50–50 chance that there will be some restrictions. Without restrictions, management estimates its (present discounted) profit at $125 million; with restrictions, its profit would be only $25 million. Management must decide now, before knowing the government’s decision, whether to redesign parts of the aircraft to solve the noise problem. The cost of the redesign program is $25 million. There is a .6 chance that the redesign program will solve the noise problem (in which case, full landing rights are a certainty) and a .4 chance it will fail. Using a decision tree, determine the consortium’s best course of action, assuming management is risk neutral.
A European consortium has spent a considerable amount of time and
money developing a new supersonic aircraft. The aircraft gets high marks
on all performance measures except noise. In fact, because of the noise,
the consortium’s management is concerned that the U.S. government may
impose restrictions on some of the American airports where the aircraft
can land. Management judges a 50–50 chance that there will be some
restrictions. Without restrictions, management estimates its (present
discounted) profit at $125 million; with restrictions, its profit would be
only $25 million. Management must decide now, before knowing the
government’s decision, whether to redesign parts of the aircraft to solve
the noise problem. The cost of the redesign program is $25 million. There
is a .6 chance that the redesign program will solve the noise problem (in
which case, full landing rights are a certainty) and a .4 chance it will fail. Using a decision tree, determine the consortium’s best course of
action, assuming management is risk neutral.
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