A company is considering a new product launch. There is a 0.6 chance that demand for the product will be strong and a 0.4 chance that demand will be weak. Two strategies for the launch are possible: 1 has high promotion costs and a net cash outflow of K120 000 if demand proves to be strong, and if demand proves weak a net cash outflow of (K30 000) will result. Strategy 2 has low promotion costs and if demand is strong will generate a cash inflow of only K80 000 but with weak demand a net cash inflow of K20 000. Draw a decision tree and advise which course of action generates the greatest expected profit. What is the maximum amount that should be paid for market research to determine with certainty whether demand will be strong or weak?

Decision trees are a popular technique to take a complex decision and break it down into simpler…

Answered: A company is considering a new product…

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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A company is considering a new product launch. There is a 0.6 chance that demand for the product will be strong and a 0.4 chance that demand will be weak. Two strategies for the launch are possible: 1 has high promotion costs and a net cash outflow of K120 000 if demand proves to be strong, and if demand proves weak a net cash outflow of (K30 000) will result. Strategy 2 has low promotion costs and if demand is strong will generate a cash inflow of only K80 000 but with weak demand a net cash inflow of K20 000.

Draw a decision tree and advise which course of action generates the greatest expected profit.
What is the maximum amount that should be paid for market research to determine with certainty whether demand will be strong or weak?

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