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A company is considering whether to develop an overseas market for its products. The cost of developing the new market is estimated to be 250,000.
A company is considering whether to develop an overseas market for its products. The cost of developing the new market is estimated to be 250,000. There is a 70% probability that the development of the new market will succeed and a 30% probability that the development of the new market will fail and no further expenditure will be incurred. If the market development is successful the profit from the new market will depend on prevailing exchange rates. There is a 50% chance that exchange rates will be in line with expectations and a profit of 500,000 will be made. There is a 20% chance that exchange rates will be favourable and a profit of 630,000 will be made and a 30% chance that exchange rates will be adverse and a profit of 100,000 will be made. The profit figures stated are before taking account of the development costs of 250,000. Required: a) Evaluate the proposal using Decision tree analysis and the Expected Value methodology b) Calculate the proposal's standard deviation A company is considering whether to develop an overseas market for its products. The cost of developing the new market is estimated to be 250,000. There is a 70% probability that the development of the new market will succeed and a 30% probability that the development of the new market will fail and no further expenditure will be incurred. If the market development is successful the profit from the new market will depend on prevailing exchange rates. There is a 50% chance that exchange rates will be in line with expectations and a profit of 500,000 will be made. There is a 20% chance that exchange rates will be favourable and a profit of 630,000 will be made and a 30% chance that exchange rates will be adverse and a profit of 100,000 will be made. The profit figures stated are before taking account of the development costs of 250,000. Required: a) Evaluate the proposal using Decision tree analysis and the Expected Value methodology b) Calculate the proposal's standard deviation
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