HFSC Ltd has developed a promising new product. The business has three options available. It
can sell the idea of the new product to a company for N$20 000, it can hire a consultant to study
the market and then make a decision, or it can arrange financing for building a factory and then
manufacture and market the product.
The study will cost HFSC Ltd N$10 000, and its management believes that there is a 50-50 chance
that a favourable market will be found. If the study is unfavourable, management believes that it
can still sell the idea for N$12 000. If the study is favourable, it believes that it can sell the idea for
N$40 000. But even if a favourable market is found, the chance of an ultimately successful product
is about 40%. A successful product will earn a profit of N$500 0000.
Even with unfavourable study, there is only a 10% chance that a successful product can be expected.
If HFSC Ltd’s management decides to manufacture the product with study, there is only a 20%
chance of being successful. A product failure costs N$100 000.
REQUIRED :
Draw a decision tree and determine the course of action that would
maximise expected profits for HFSC Ltd