Development At ICI: Anthraquinone Harvard Case Solution & Analysis

INTRODUCTION

A new use for Anthraquinone was found by the research division of ICI. The board was now at the point to decide that whether the management of the company should go forward with the research and development of the new unpatented use of Anthraquinone or not. The research and development effort on this project had already been started by the company. The process was to reach at the point where the company would be able to commercialize the project on a full-scale comprised of some steps. These steps included the research process for the identification of the new process, process development after the identification of the new process, preliminary market development and preliminary commercial development. The company had also identified different probabilities for the Anthraquinone project for the estimated expenses of the project.

CONCEPT USED FOR PROJECT DECISION ANALYSIS

The research project which is to be undertaken by the company involves money. Most of the decisions involving money are resolved by computing the expected values for each of the possible outcomes or alternatives. The alternative with the highest expected value is then selected because it yields the highest possible payoffs for the business. In order to calculate the expected value of a particular outcome the respective payoffs are multiplied by the probability of occurrence of that outcome. These probabilities are assigned to address the uncertainties involved in the projects. The probabilities for each possible outcome are assigned by experts by studying the past experiences and past trends. Risk is involved in these decisions.

After the expected values have been calculated for each of the possible outcomes, the decision maker has to select the outcome that best fits the risk profile of that individual. A decision maker who is a risk taker individual rather than a risk neutral individual, might want to take higher risks because he wants to yield higher returns. In the light of this risk profile, this individual might not choose the alternative with the highest expected value. Instead, he might choose an alternative which has the lowest expected value and its probability or chances of success are too low but the payoffs coming from the project would be high.

On the other hand, another investor might be a risk averse investor, who would always accept the decision alternative that yields the highest expected value for the company. In this case, the assigned probabilities for the respective possible outcomes would be high and the payoffs would be low, therefore, to be on the safe side, the decision maker would be very much conservative in his decision making. Basically, the final decision making for a particular project depends on a range of factors such as the risk profile of the decision maker, authenticity of the assigned probabilities, time period of the project and the magnitude of uncertainty.

ANALYSIS OF INVESTMENT ON ANTHRAQUINONE

The expected value model has been developed in order to reach to a final decision. However, a few assumptions have been made in order to analyze this model and then to reach to a final decision. These assumptions are listed below:

ASSUMPTIONS

  • The assigned probabilities for each of the research and marketing expenses are based on past experiences and they incorporate uncertainty into the project.
  • The net present value of the project has been calculated by considering all the tangible and intangible costs associated with the project.
  • A reasonable estimate has been made regarding the costs related to process research, product development and market research.
  • The risk profile of the management of ICI is assumed to be that of a risk neutral investor.
  • In case the project is unsuccessful, the company would at least meet its breakeven point.

EXPECTED VALUE OF THE RESEARCH DEVELOPMENT PROJECT

Based on the data given in the case study, the expected value has been calculated for the business if the project either becomes successful or becomes unsuccessful. The calculations have been divided into two parts. The first part is based on an optimistic approach and the second part has been calculated based on a pessimistic approach................................

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