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 probability 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. The number of the decision boxes are 5 and the chances nodes are 7
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 probability 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. The number of the decision boxes are 5 and the chances nodes are 7
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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draw the decision tree

Transcribed Image Text: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 probability 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.
The number of the decision boxes are 5 and the chances nodes are 7
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