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A company needs to decide whether to enter a new market segment or not. The initial cost of equipment and building infrastructure is $2,000,000 and
A company needs to decide whether to enter a new market segment or not. The initial cost of equipment and building infrastructure is $2,000,000 and the useful life of being activated in that market segment is estimated to be 10 years. Considering the competition and consumers behavior, two possible scenarios of successful (S) and unsuccessful (U) may happen for the market penetration. The company estimates with probability 0.7 the company will successfully penetrate in the market and increase its market share and with probability of 0.3 the company will be unsuccessful in market penetration. Under scenario of S, the company will make $800,000 revenue at first year and the revenue will be increased by $100,000 from year 2 each year for the rest of the project life. Under scenario U, the company will make $400,000 revenue at the first year. Then company can decide to stop working in this market segment and switch to another market segment. If do so, the equipment and infrastructure can be used in the new market segment and the salvage value will be $1,500,000. The company may decide to boost its image and sales operation by running promotion plans that will need $100,000 as annual promotion and marketing cost over the rest of project life. If decides to go for image boosting, then two possible options A and B may happen. Option A is estimated to happen with 0.6 probability which will increase the annual revenue to $850,000 for the rest of project life. Option B may happen with 0.4 probability and will increase the annual revenue to $700,000 for the rest of project life. The annual interest rate is 10% and salvage value at the end of project life (year 10) will be zero. Analyze the decision of this company by decision tree method to see if it is economical to target the new market segment or not
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