Reference no: EM132784002

Magnatree is a large company that has been working on a new product. This product has tremendous potential, but Magnatree must move quickly. They have decided that they will introduce the product in two months and have already started developing their advertising campaign.

They are sure that the product will be a success, with a possibility that it will be a huge success. They recently found out that another company, Shadycorp, has some unique expertise that could significantly improve the new product. They contacted them and Shadycorp offered to sell their expertise to Magnatree for $6 million. Magnatree needs to make an immediate decision on Shadycorp's offer or it will be too late to investigate the use of the expertise in design of the new product. Without the expertise Magnatree has a 40% chance of making the new product a huge success. Without the expertise there will be a 25% chance of the new product being a huge success and 65% chance of it being a "success", otherwise will be a failure.

If the new product is a huge success, the net present value of its future profits is expected to be $50 million. If it is merely a success, the net present value of its future profits is expected to be $20 million, but it fails it will bring in only $1 million in revenues which is much less than the cost.

(a) Construct a decision tree model to represent this situation. The model should include al decision options. Solve your model showing clearly all calculations. Make sure to include the expected result ($) of your decision and the value at each node.

(b) What is the best decision strategy based on your evaluated model?

(c) What is the expected value in making this decision?