Problem:
In order to sell HW solutions for students of ACCT 400 Fall 2008 semester, a company may advertise heavily on TV, radio, and newspaper (the cost of advertising paid today, May 2007 is $2,400,000), may advertise a little on radio and newspapers (the cost is $250,000 paid today), or may not advertise at all.
If the company decides to advertise of TV, radio, and newspapers it expects to sell 2,000 copies of solutions @ $2,000 per copy if there is one section of ACCT400, and 2,500 copies @ $2,000 per copy if there are two sections of the class in Fall 2008. If it advertises only on radio and newspapers, it expects to sell 1,000 copies of solutions @ $1,800 per copy if there is one section of ACCT400, and 1,500 copies @ $1,500 per copy if there are two sections of the class in Fall 2008. If the company chooses not to advertise at all, it may sell only 900 copies @ $1,500 per copy if there is one section, and 1,300 copies @ $1,400 if there are two sections of ACCT400 in Spring 2008.
The students can buy the solution only in May 2008. The correct discount rate from May 2008 to today is 12%. But the company has no control over the number of sections of ACCT400 and that will be decided by another department later. The company believes the faculty will favor two sections with the probability 30%, and one section with the probability of 70%. If the company chooses to proceed, today's investment is $900,000 in any of three cases plus advertisement costs if applicable. There are no other costs associated with this project.
What should the company do?? The solutions can be sold only once.