Research & Development Decision

BUS9040M: Decision Analysis for Managers
Assignment 2: Case Study – BMAC Research & Development Decision (Part 1)

Note: Please do make sure that you appropriately cite any reference material, using
Harvard Referencing style and ensure that you draw from quality academic sources. On
this note, remember that general internet sources such as Wikipedia and Investopedia
are not recognised academic sources.

Following on from what you have learnt about the key elements of decision problems and
structuring/modelling decision problems from your readings and lectures, this activity provides
you with the opportunity to apply your knowledge to a case study on BMAC research and
development (R & D) decision problem.
Read the BMAC research & development (R & D) decision case study below and address the
following questions related to the case study (
Approximately 500 words in total, excluding
diagrams and references
(1) Construct a
decision tree to represent BMAC’s decision problem
(2) Using your decision tree (from 1 above) and the folding back the tree procedure, calculate
expected monetary value (EMV) of the two options at the root of the BMAC’s
decision problem i.e. (A) Continue with the R &D project at a cost of $ 5 Million or (B)
Stop R & D project at no cost. Which alternative or strategy should BMAC pursue in order
to maximize their revenues?
(3) It may be expected that the EMV and hence your recommended strategy for BMAC
obtained in in question 1 above critically depends on uncertain variables or chance events
that are not within the control of the decision maker. Therefore, conduct a sensitivity
analysis on your recommended strategy for BMAC and briefly explain the implications of
your results to BMAC’s decision problem.
Guidance: Organise your answer on an excel spreadsheet and construct a sensitivity graph.
Remember to copy and paste your results/sensitivity graph into your submission.

(4) Briefly discuss at least one example from your reading of the academic literature (peer
reviewed journal articles) in which decision trees have been applied to structure a decision
problem. (
focus on the literature relevant to your master’s degree subject area)

Case study: BMAC Research & Development decision
BMAC, a research and development (R & D) company, must decide whether to spend $5
million to continue with a particular drug development research project. The success of the
project (as measured by obtaining a patent) is not assured, and at this point the decision
maker judges only a 60% chance of getting the patent. If the patent is awarded, the company
can either license the patent for an estimated $30 million or invest an additional $20 million
to create a production and marketing system to sell the product directly. If the company
chooses the latter, it faces uncertainty of demand (categorized as high, medium or low
demand) and associated profit from sales. The probabilities of the three levels of demand
and associated revenues are summarised on the Table below.

Probability Revenue ($M)
Demand High 0.30 60
Demand Medium 0.45 40
Demand Low 0.25 20

It is possible to construct the decision trees required in the assignment manually or by hand
(i.e., without the need for specialised software).
However, you are strongly advised to use a free Excel Add-in called
Treeplan to construct
decision trees. Follow the link below for YouTube instructions on how to download and use
Treeplan to construct decision trees. (
ensure that copy your decision trees and paste into your