Question related to Decision Trees

Shilimela limited is considering the launch of a new pop group, Elsewhere. If the group is launched without further market research being carried out it is thought that demand for their records and the present value of profit earned from the record sales will be as follows.

Demand

Probability

Present value of profit

High

0.5

N$400 000

Medium

Low

0.3

N$50 000

0.2

(N$150 000)

It is possible, however, to commission a market research survey which will forecast either a successful or unsuccessful career for Elsewhere. The probability of an unsuccessful career is 0.3.

Probabilities of high, medium or low demand for Elsewhere’ s records under each of the two market research results are as follows.

Demand

High

Medium

Low

Successful chart career

0.8

0.1

0.1

Unsuccessful chart career

0.1

0.2

0.7

So, for example, if the research indicated an unsuccessful chart career, then the probability of medium demand for the group’s records would be 0.2. The survey would cost N$35 000.

Required

1. Calculate the expected value of profit if Shilimela limited do not commission a market research survey. (3 Marks)

2. Draw a decision tree to show the choices facing Shilimela limited. Briefly explain

whether or not the record company should commission the survey. (22 Marks)

3. Determine the maximum the company should pay for the survey. (2 Marks)

4. Briefly explain the disadvantages of using expected values and decision trees as decision-making tools. (3 Marks).

Please can you tell me how to solve the third part. The EV for no survey is 185, and for Survey it is 200.5. so do we just substract them both or do we have to do something else because if we consider a successful career and surver the EV of that would be 217. So please tell me about the third part, im confused.