Draw a decision tree for Mr. Sakala indicating all choices and events What decision Mr. Sakala should take regarding the investment of K100,000? If Mr. Sakala is a risk averter, should he change the decision given by you?
OPERATIONS RESEARCH TWO
Sakala is interested in developing and marketing a new drug. The cost of extensive research to develop the drug would be K100,000. The manager of research programme said that there is 60% chance that the drug will be developed successfully. The market potential is assessed as follows with present value of profit:
|
Market conditions |
Probability |
Present value of profits (K) |
|
Large market potential |
0.1 |
500,000 |
|
Moderate market potential |
0.6 |
220,000 |
|
Low market potential |
0.3 |
80,000 |
The present value figures do not include the cost of research. While Mr. Sakala was considering this proposal, another similar proposal came up which also required the investment of K100,000 .The present value of profit for the second proposal wasK120,000. The
- Draw a decision tree for Mr. Sakala indicating all choices and events
- What decision Mr. Sakala should take regarding the investment of K100,000?
- If Mr. Sakala is a risk averter, should he change the decision given by you?
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