Should the movie producer bid for the film rights

Reference no: EM13205220

A movie producer has to decide whether to bid for the film rights of a modestly successful novel. If he bids, he believes there is a 90% chance that he will be successful in obtaining the rights. If the bid is unsuccessful he will have to pay legal and administrative costs of $0.5 million. If he is successful he has to decide whether to hire a big star for the main role. If he hires a big star the probability that the movie will be successful and make a profit of $50 million is 30% and the chance that it fails and makes a loss of $20 million is 70%. If he doesn't hire a big star there is a 20% chance of the film making a profit of $30 million and an 80% chance that it makes a loss of $10 million. (Note that all profits numbers stated that result from a successful bid do include the legal and administrative costs of the bid itself.)

Should the movie producer bid for the film rights? Justify your recommendation with a sequential decision tree.

Reference no: EM13205220

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