This decision concerns whether to develop a microprocessor-controlled machine tool. The...

This decision concerns whether to develop a microprocessor-controlled machine tool. The high-technology microprocessor-equipped machine costs $4 million to develop, and the low-technology machine costs $1.5 million to develop. The low-technology machine is less likely to receive wide customer acclaim (P = 0.3) versus P = 0.8 for the microprocessor-equipped machine. The expected payoffs (present worth of all future profits) are as follows:

If the low-technology machine does not meet with strong market acceptance (there is a chance its low cost will be more attractive than its capability), it can be upgraded with microprocessor control at a cost of $3.2 million. It will then have an 80 percent chance of strong market acceptance and will bring in a total return of $10 million. The non-upgraded machine will have a net return of $3 million. Draw the decision tree and decide what you would do on the basis of (a) net expected value and (b) net opportunity loss. Opportunity loss is the difference between the payoff and the cost for each strategy.