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Jaguar Private Limited Company is engaged in the production of power transformers. Currently, the management team of the company is trying to decide whether to release a new highly innovative power transformer, or whether to continue testing it. Releasing the product immediately would ensure good sales, as no other manufacturers had anything like it. However, this would be at an estimated 10% risk of serious problems which would result in halving the revenue. Another six months testing would reduce the chance of problems to 5%, but at an estimated 8% risk of a comparable power transformer being introduced by the competition. The company decided to use a Decision Tree to calculate the Expected monetary value. The sales (payoff values) associated with each strategy-state of nature combination is provided in the following table
Sales (in $)
Problems (sales-50%)
No problems
Release now
50,000
100,000
Test more
Competition (sales-20%)
40,000
80,000
No competition
Required
a. Set up a decision tree for the company's situation
b. What will be the optimal strategy the company should consider under the EMV approach?
c. How much expected monetary value would the company secure as a result of the chosen (optimum) strategy
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