3. XYZ Limited has a new wonder product, the 'dolus' of which it expects great things. At the moment the company has two courses of action open to it, to test market the product or abandon it. If they test it, it will cost R100 000 and the market response could be positive or negative with probabilities of 0,60 and 0,40. If the response is positive the company could either abandon the product or market it full scale. If it markets the 'dolus' full scale, the outcome might be low, medium or high demand, and the respective net pay-offs would be (200), 200 or 1 000 in units of R1 000 (i.e. theresult could range from a net loss of R200 000 to a gain of R1 000 000). These outcomes have probabilities of 0,20, 0,50 and 0,30 respectively.

If the result of the test marketing is negative and the company goes ahead and markets the product, estimated losses would be R600 000. If, at any point, the company abandons the product, there would be a net gain of R50 000 from the sale of scrap. All the financial values have been discounted to the present.

Required:

a. Draw a decision tree.

b. Include figures for cost, loss or profit on the appropriate branches of the tree.

c. Evaluate the decision tree.