Question 5 (15 marks) Beethoven has a new wonder

Question 5                                                                                                                                                        (15 marks)

Beethoven has a new wonder product, the vylin, of which it expects great things. At the moment the company has two courses of action open to it, to test the product or abandon it.

If the company tests market it, the cost will be N$100 000 and the market response could be positive or negative with probabilities of 0.60 and 0.40 respectively.

If the response is positive the company could either abandon the product or market it full scale.

If it markets the vylin full scale, the outcome might be low, medium or high demand, and the respective net gains/ (losses) would be (200), 200 or 1 000 in units of N$ 1000 (the result could range from a net loss of N$200 000 to a gain of N$1 000 000). These outcomes have probabilities of 0.20, 0.50 and 0.30 respectively.

If the result of the test marketing is negative and the company goes ahead and markets the product, the estimated losses would be N$600 000.

If at any point, the company abandons the product, there would be a net gain of N$50 000 from the sale of scrap. All financial values have been discounted to the present value.

Required:

Using decision tree approach, advise the management of Beethoven on which option to take.