A. A company is considering a new product launch. There is a 0.6 chance thatdemand for the product will be strong and a 0.4 chance that demand will beweak. Two strategies for the launch are possible: 1 has high promotion costs anda net cash outflow of K120 000 if demand proves to be strong, and if demandproves weak a net cash outflow of (K30 000) will result. Strategy 2 has lowpromotion costs and if demand is strong will generate a cash inflow of only K80000 but with weak demand a net cash inflow of K20 000.i.Draw a decision tree and advise which course of action generates thegreatest expected profit.ii. What is the maximum amount that should be paid for market research todetermine with certainty whether demand will be strong or weak?B. Assume a loss exposure of K100 00 for which the probability is estimated to be.01. Insurance against loss from this exposure will cost K1500 annually. Shouldthis exposure be insured or retained? Use the Minimax Regret strategy toalternatively evaluate the decision. Would this change the decision from theearlier position? Explain.

NOTE: We are allowed to do one question with its three sub-parts. Expected value is one of the most…

Answered: i. Draw a decision tree and advise…

Practical Management Science

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