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Your company must decide whether or not to introduce a new product. The sales
of the product will be either at a high level (a success) or quite low (a flop), The
conditional value for this decision is as follows:
Decision States of Nature
High Sales Low Sales
(H) (L)
Introduce product $4,000,000.00 -$2,000,000.00
Do not intrduce product 0 0
Probaility 0.3 0.7
Your company has the option to conduct a market survey to better ascertain the 
true market demand. The survey will cost $0.2M. The survey does not provide
perfect information about sales, but there are three possible outcomes from the
survey: (1) the survey may predict success (high sales) for the new product, (2)
the survey may predict that the new product will fail (low sales); or (3) the 
survey result may be inconclusive. You are given the following notation and 
information:
Conditional Probablity of Survey Predictions, Given Potential Sales
Potential Level of Sales
Market Survey Results
(Survey Prediction)
High Sales Low Sales
(H) (L)
Survey predicts high sales (S) 0.4 0.1
Survey inconclusive (I) 0.4 0.5
Survey predicts low sales (F) 0.2 0.4

To evaluate the economic worth of the survey, answer the following questions:

(a) Based on the expected monetary value, what is your decision before taking the survey?

(b) What is the expected value of the perfect information before taking  the survey?

(c) Draw the complete decision tree with the survey option?

(d) What is the expected value of the perfect information after you have taken the survey?

(e) What is the worth of the survey informatio ?

(f) What is the best course of action?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M92038252

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