The launch of a new product is being considered. There is a 0.6 chance that demand for the
product will be strong and a 0.4 chance that demand will be weak. Two strategies for the
launch are possible. Strategy 1 involves high promotion costs and will generate a net cash
inflow of £120,000 if demand proves to be strong. However, if demand proves to be weak
then a net cash outflow of £(30,000) will result. Strategy 2 involves low promotion costs. If
demand proves to be strong then this will generate a net cash inflow of only £80,000 but if
demand proves weak then a net cash inflow of £20,000 is still generated.
Requirement
(a) Draw a decision tree and advise which course of action generates the greatest expected profit.
(b) What is the maximum amount that should be paid for market research to determine with certainty whether demand will be strong or weak?