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 Bails March 4th, 2010 06:02 PM

Decision Tree - Is there a problem with this problem?

The below problem comes from an Australian university and was given in semester two, 2009. The problem itself is actually a high school level decision tree, however I found the answer a little more challenging than I had expected. I don't want to alert anyone to why I had trouble, but does anyone else see a problem with this problem?

"You are the director of a manufacturing company that has just developed a new product, but are not sure whether to market it or not. If the product is a success, the company will profit \$1,500,000. If the product is a failure, the company will lose \$250,000. If you go straight into production, there is a 50% chance the product will be a success and a 50% chance the product will be a failure.

You do, however have the option of test marketing the product first for \$50,000. If you test market first, there is a 60% chance the product will be judged favourable by the test, and a 40% chance the product will test unfavourably. If the testing is favourable, there is a 80% chance the product will be a success and a 20% chance the product will be a failure. If the testing is unfavourable, there is a 30% chance the product will be a success and a 70% chance the product will be a failure.

Use a decision tree to determine the likely financial outcomes and best decision options for the company."

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