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Decision tree

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Company XYZ must decide whether or not to introduce a new version of its product. The president thinks that the probability is 0.75 that the new version will be successful and 0.25 that it will not. If the product is a success, the company will gain $300,000. If it is a failure, the company will lose $150,000.

a. Construct a decision tree that you can use to solve the problem, assuming the president is risk neutral.
b. Will the risk-neutral president decide to introduce the new product?
c. What is the expected value of perfect information?
d. Calculate the probability that the new version will be successful that will make a risk neutral president indifferent between introducing it and not introducing it, assuming the payoffs of $300,000 for success and -$150,000 for failure?

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This provides an example of constructing a decision tree and finding expected value and probability.

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Company XYZ must decide whether or not to introduce a new version of its product. The president thinks that the probability is 0.75 that the new version will be successful and 0.25 that it will not. If the product is a success, the company will gain $300,000. If it is a failure, the ...

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