A company is developing a new type of tablet. Based on historical data, they have estimated that there is 70% chance demand for the new tablets will be high and 30% it will be low. The company can choose to develop two alternative models of the tablet. Model 1 requires an initial investment of £200,000; and if demand is high, the company will gain £500,000 in revenue from Model 1 but only £150,000 if demand is low. Model 2 requires an initial investment of £175,000 and the company will gain revenues of £450,000 if demand is high but only £130,000 if demand is low.
(a) Draw a decision tree to represent this problem and, by evaluating the decision tree, state what decision the company should take. [15 Marks]
The company is considering conducting a market research study, which would cost £5,000. Analysis of historical data of market research studies conducted before introducing a new product shows when a product receives a favourable survey response, there is a 90% chance it will result in high consumer demand but 20% of products that receive favourable survey responses result in low demand.
(b) Is the market survey worth doing? Explain. [15 Marks]
To a) I found:
Model 1= 0.70(500,000)+0.30(150,000) = 395,000
395,000 - 200,000 = 195,000
Model 2= 0.70(450,000)+0.30(130,000) = 354,000
354,000 - 175,000 = 179,000
This shows model 1 would be the better option, is this correct?
I have no idea how to do section B!?
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