Problem:
Harvey Publishing Company, a small publisher in Columbus, is considering a new book. Typesetting and related costs to prepare for the production are $10,000. It will cost $2 per copy to produce the book. If additional copies are needed at a later time, the set-up cost will be$5,000 and the cost per copy will again be $2. The book will sell for $14 a copy. Royalties, commissions, shipping costs, and so on will be $4 a copy. If the book gets good reviews, it can be expected to sell 5,000 copies a year for 3 years. If it gets bad reviews, sales will be 2000 copies in the first year and will then cease. There is a 0.3 probability of a favorable review. Sally Harvey, president, faces a choice between ordering an immediate production run of 15,000 copies or a production run of 5,000 copies, followed by an additional production runs at the end of the first year if the book is successful. All production runs must be in increments of 5,000 copies. Harvey uses a 10% required return for evaluating new investments. She will pay no taxes because of previous losses and her capital is very limited. Use decision tree analysis to recommend a production schedule and decide whether to publish the book.