Professional Documents
Culture Documents
Influence Diagram
1
Outcome: P1: Success
Outcome: L1: Win
L2: Lose P2: Failure
L3: No Lawsuit Product: Success
or Failure?
Lawsuit
Decision:
Accept
Profits
or
refuse?
D1: Salary +
Royalty
D2: Cash + Stock
Options
D3: Refuse
2
Fred’s decision model. If he were to refine his model, what refinements
should he make?
Decision Tree
D1
$ 1.33m S2 (0.2)
$ 0.30 million
S1 (0.8)
$ 1.41 million
D2
$ 2.24m
$ -0.015 million
D3 S2 (0.2)
$ 2.24m L2 (0.4)
$ -0.035 million
Refuse the Offer
3
Annual cash flow = $0.26 m
Success:
NPV of future stream of income =
0.26m 0.26m 0.26m
+ 2
+ ... + = $1.6m
1.01 1.01 1.0110
Failure:
NPV of salaries over 10 years =
0.05m 0.05m 0.05m
+ 2
+ ... + = $0.307m
1.01 1.01 1.0110
Success,
70000 *12
NPV of stock option profit = = $904,420
1.011.5
Hence, total NPV of cash received = 500,000 + 904,420 = $1.40m
Failure,
4
Legal fees are paid by PI. However, Fred still has to return the money
to the creditors.
Hence, NPV = $ -0.015m