Reference no: EM133129866

Question - A company is considering whether to open another shop to dry clean clothes. The cost of fitting out the premises will be £325,000 and they estimate there is a 0.80 probability that the venture will be a success. If the shop is successful they estimate the profits after the fitting out costs will be:

£500,000 profit if the shop is very successful;

£150,000 profit if it is moderately successful; and

£10,000 profit if it is just successful.

The estimate probabilities for each of these events are:

Very successful 0.30

Moderately successful 0.45

Just successful 0.25

If the shop is unsuccessful the loss will be equal to the cost of fitting out the premises.

Required -

1. Using a decision tree calculate the expected profit or loss of opening the new store.

2. Advise the company whether it should proceed with the venture giving regards to the projected returns and probability of failure.