Reference no: EM131054919
A company with an ageing product range is investigating the launch of a new range. Its business analysts have mapped out the following scenarios
Scenario 1 - Continue with the old range with profits declining at 10% per annum on a compounding basis. Profits ffrom this range for the previous year totalled $60000
Scenario 2 - Introduce a new range without any prior market research. If sales are high, annual profit is put at $ 90000 with a probability of 0.7. If sales are low, annual profit is put at $30000, with a probability of 0.3.
Scenario 3 - Introduce a new range with prior market research costing $30000. The market research will indicate whether future sales are likely to be 'good' or 'bad'. If the research indicates 'good', then the management will spend $35000 more on capital equipment and this will increase the annual profit to $1000000, provided sales are actually high. However, if sales are actually low, the annual profit will drop to $25000. Should management decide not to spend more on promotion (given a good research report), then the profit levels will be as for scenario 2. If the research indicates 'bad', then management will scale down their expectations for an annual profit of $70000.
Probability calculations receal the following information.
The probability of a favourable research report = 0.59
The probability of high sales given a favourable research report = 0.95
The probability of high sales given a unfavourable research report = 0.34
With the aid of a decision tree prepare a quantitative report advising the company on the optimal course of action.
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