Problem
ICI Canada
ICI's Canadian subsidiary (now part of AkzoNobel) discovered a new but unpatentable application for a chemical agent to reduce pulp-mill water pollution.17 However, everything was quite uncertain, and the management was trying to decide whether to go ahead with its R&D or abandon the product. The following questions indicate the primary risks:
Would market tests confirm that there is a significant market for the product and could the company develop a new process for making this product-that is, is it technically feasible?
After a production process is developed, would the company's board sanction production on a commercial scale? Would the venture turn out to be commercially successful?
The management team assumed that each of these questions had a yes or no answer. The probabilities of yes answers are shown below. The plus-or-minus values indicate management's uncertainty about the true probabilities.
Significant market and technical feasibility (P1)
0.36 ± 0.09
Board sanctions plant (P2)
0.8 ± 0.2
Commercial success (P3)
0.8±0.2
ENG
The primary economic factors and their expense/gain (in million dollars) were the following:
The marketing development cost to determine whether there is a significant market, and research expenses to identify a new production process for the product (C1): $1 ± 25%
The process development costs, including pre-sanction engineering and commercial development (C2): $3.5+ 25%
. The process development costs, including pre-sanction engineering and commercial development (C2): $3.5 ± 25% The commercial development costs after the board's sanction (C3): $1.0 ± 25%
The venture value (net present value) if successful (R): $25 ± 50%
The plus-or-minus values indicate management's considerable uncertainty about the values.
Task
Should management go ahead with R&D for this product? How can this question be fully answered?