Dec Tree Wander Drugs Inc is about to launch a breakthrough

Dec. Tree: Wander Drugs Inc. is about to launch a break-through drug to the market. The basic decision is whether to build a big plant (cost of P20M)or a small plant (cost of PloM) or even whether to conduct a survey first. Should the market response to the product be good and they build a big plant-they could make P50M from the product less the P20M plant cost for a net a large plant, they expect to make P30M from the product less the P20M plant cost for a net payoff of PIOM Should they decide to build a small plant (cost of P10 M), they expect to make P30M from either scenario (as their production capacity can only meet that of the low market) for a net payoff of P20M from either scenario Based of previous introduction of similar products, the estimated chance for a good market response is 60% while that of a low market response is 40% of P30M. Should the market response be low and they build Alternatively, they could opt to conduct a survey first (for a cost of PO.5M) to get a better read of the actual market response to the product. Should the survey result to a favorable reaction to the product, there is an 80% chance of a good market response to the product and a 20% chance of a low market response. On the other hand. should the survey result to an unfavorable reaction to the product, there is a 70% chance of a kw market response to the product and a 30% chance of a good market response to the product. From past experience, it is noted that the probability of a favorable reaction to the product in surveys is 05 and that on an unfavorable reaction of 05 Based on the foregoing. construct a decis ion tree for the foregoing to ascertain the best decision. Favorable (P Survey Small Plant Bg Plant- Unfavor able (P) Bg Plant Good Mkt. (P Small Plant Good Mkt. (P Small Plant-. Low Mkt. (P)

Solution

Payoff for big plant = 0.6x30+0.4x10 = 22M

Payoff for small plant = 20M

Payoff with survey ( favorable)

Big plant = 30x0.8+10x0.2 = 26

Small plant = 20

Payoff with unfavourable response

big plant = 30x0.7+10x0.3 = 24

Small plant = 20

As the probability of both cases is equal, the big plant with favourable response has highest payoff = 26M - cost of survey = 25.5M