Contract with the editor publishing company terms

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An editor of a publishing company has just received a manuscript for a book. After reviewing the material the editor's intuition is that the proposed book has 40 percent chance to be successful and a 60 percent chance to fail. If it is successful, the publishing company can expect to make a profit of $100,000 over a period of five years. If the book is a failure, the company will lose S50,000. If the editor decides to publish the book there is only a 50-50 chance of convincing the authors to sign a contract with the editor's publishing company's terms and conditions. The manuscript can be sent off for outside review for expert opinion for a cost of $1000. In the past this review process has successfully predicted the success or failure of a book 80 percent of the time, that is, Preview predicted success and the book was successful) = 0.80 and Preview predicted failure and the book failed) = 0.80. Make a decision tree for this problem and find the maximum EMV. Also find the EVSI.

Reference no: EM131735429

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