(a) The following information relates to Passion Trees Ltd a company which is

exploring the possibility of whether to develop and market a product.

Probability

Development

Being successful 0.75

Being Unsuccessful 0.25

Estimated development cost would amount to $280,000

If Successful, the product will be marketed and the probabilities and related

cost are detailed below:

Probability Profits/loss

very successful 0.4 $640,000

Moderately Successful 0.3 $200,000

Failure 0.3 ($400,000)

The profit/losses figures include the effect of the development costs.

REQUIRED

Draw a decision tree to illustrate the above problem, and recommend the best

course of action Passion Trees Ltd should undertake.

(b) Decision criterion are often selected between mutually exclusive courses of

action on the basis of worst, most likely or best.

In relation to risk and uncertainty explain the meaning of the following terms

used in situation of risk and uncertainty:

(i) Maximax

(ii) Maximin decision rule

(iii) Minimax regret decision rule