investigating the launch of a new range

Q.2
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.
(Use a time horizon of 6 years and ignore the time value of money)

10 years ago

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investigating_the_launch_of_a_new_range_1.txt
investigating_the_launch_of_a_new_range_2.txt