A fibre glass company is considering the possibility of introducing a new product. Because of the expense involved in developing the initial moulds and acquiring the necessary equipment to produce fibreglass, it has decided to conduct a pilot study to make sure that the market will be adequate. They estimate that the pilot study will cost £12,000. Furthermore, the pilot study can be either successful or unsuccessful. The basic decisions are to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, the company can expect to make £100,000 from the large facility or £60,000 from the smaller facility. If the market is unfavourable, however, they estimate that they would lose £40,000 with a large facility, while they would lose only £30,000 with the small facility. The company estimates that the probability of a favourable market given a successful pilot study is 0.7. The probabili
A fibre glass company is considering the possibility of introducing a new product.
Because of the expense involved in developing the initial moulds and acquiring the
necessary equipment to produce fibreglass, it has decided to conduct a pilot study to
make sure that the market will be adequate. They estimate that the pilot study will cost
£12,000. Furthermore, the pilot study can be either successful or unsuccessful. The basic
decisions are to build a large manufacturing facility, a small manufacturing facility, or
no facility at all. With a favourable market, the company can expect to make £100,000
from the large facility or £60,000 from the smaller facility. If the market is unfavourable,
however, they estimate that they would lose £40,000 with a large facility, while they
would lose only £30,000 with the small facility. The company estimates that the
of an unfavourable market given an unsuccessful pilot study result is estimated to be 0.8.
They feel that there is a 50-50 chance that the pilot study will be successful. Of course,
the company could decide not to commission the pilot study and therefore make the
decision as to whether to build a large facility, small facility or no facility at all. Without
doing any testing in a pilot study they estimate that the probability of a successful market
is 0.7.
Draw a decision tree for the above company and write down the REVENUES and
COSTS at the end of branches.
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