Using expected monetary value as decision criterion

Reference no: EM1364814

Bill Goodman has been offered the opportunity to invest $15,000 in a start-up company that intends to supply personal digital assistants (PDAs) to physicians in order to enable them to determine the approved medication for each HMO patient they treat. The business plan for this start-up calls for raising a total of between $10 million and $40 million in financing and then taking the company public.

To be successful in raising these funds, the firm must first be able to hire a respected professional in the medical industry to be the firm's CEO. Bill believes that there is a 80% chance of the firm accomplishing this requirement. Following the hiring of the CEO, the firm will also need to get backing from at least two of the leading four HMOs. Bill believes that there is a 30% chance that each of the leading four HMOs will want to be involved in this project. He also believes that the HMOs make their decisions independently.

If two HMOs sign on to the project, Bill believes the firm can raise $10 million. He also believes that the firm can raise an additional $5 million for each additional HMO that signs on to the project. Once the HMOs have signed on, the firm must then recruit physicians to adopt the system. If fewer than 5000 physicians agree to sign on to test the system, the project will fail. Bill believes that there is only a 35% chance that the firm will be able to recruit 5000 or more physicians. Finally, if the firm is successful in getting HMO and physician support, it will try to get two major drug chains to each invest $10 million. The likelihood of one drug chain investing is 30%, and the likelihood of two drug chains investing is 10%.

If the project fails to hire a CEO, recruit at least two HMOs, recruit at least 5000 physicians, or to raise at least $10 million, Bill feels he will lose his entire investment. Bill estimates the following profits on his investment if the firm is successful in raising the required funds.

Amount Firm Raises Bill's profit
(in $millions)

10 $60,000
15 $100,000
20 $130,000
25 $180,000
30 $250,000
35 $350,000
40 $500,000

On the basis of this data, determine whether Bill should invest the $15,000, using the expected monetary value as the decision criterion. Show your analysis to support your conclusion.

Reference no: EM1364814

Questions Cloud

Discuss history of portfolio design in graphics design : Discuss the history of portfolio design in the graphics design industry, and the role of a graphic designer. Discuss current trends in portfolio design, and the possible future technologies for the industry.

Define the magnitude of the acceleration of the block : define the magnitude of the acceleration of the block. What is the electric ?eld strength.

What are standardized work instructions : What are standardized work instructions? Comment on some of the characteristics that effective standardized work instructions have and the benefits

Payor source in healthcare : The government is a significant payor source in healthcare. Through Medicare and Medicaid the government is picking up the tab for a significant amount of care delivered in the United States.

Using expected monetary value as decision criterion : Bill Goodman has been offered the opportunity to invest $15,000 in a start-up company that intends to supply personal digital assistants to physicians in order to enable them to determine the approved medication for each HMO patient they treat.

Operations management-jacobs baby food company : Operations Management-Jacob's Baby Food Company - Jacob's Baby Food Company must go through the following steps to make mashed carrots

Explain the electric flux through the surface of the cube : explain the electric flux through the surface of the cube. Calculate the volume charge density of the atmosphere, assuming it to be uniform between 270 and 420 m.

Trends in medical practice in the united states : What do you consider the most important trends in medical practice in the U.S.? Discuss at least three major trends, and provide your assessment as to whether these are positive or negative trends for medical care in our country.

Estimate the height of the b plus tree : Estimate the height of the B+ tree. (Giving a range of heights is fine.) Also estimate the amount of memory needed to store the tree, including leaves but not including the posting lists themselves.

User Account

All Pages