Davon Lam is the owner of Lamda Marketing. He is considering marketing a new product that will cost $68,000. If Davon decides to market the product and the product is successful, Lamda Marketing will have revenues of $122,000. Even if the product is considered unsuccessful, the company will still have revenues of $46,000. Davon estimates that there only is a 65% probability that the product will succeed. Davon can also decide to conduct a test market for $1,850 before deciding to go to the full market. The probability that the test market will be positive is estimated at 74%. If the test market is positive, Davon feels the chance of product success is 93%. If the test market is negative, Davon feels the chance of product success at only 16%.
Use TreePlan to create a decision tree for this problem.
a) Draw a decision tree. Include ONLY the TreePlan printouts with the values. Ensure that the intermediate values are put on the proper branches of the problem. On the Decision Tree output, prune the branches that are not needed and highlight the entire optimal strategy.
b) State in words the optimal strategy for Lamda Marketing (all stages) and the associated EMV.
c) Calculate the EVSI.