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Acme Company has heard that it just got FDA approval for its new drug and needs to decide whether it should market it. Complicating
Acme Company has heard that it just got FDA approval for its new drug and needs to decide whether it should market it. Complicating this decision is the uncertainty of the eventual sales volume. If the company decides to market the product, it will incur fixed marketing costs of $5,600,000 and receive the selling price less unit variable cost, $25.2, on each unit it sells. To keep the model simple, we now assume that there are only two possible market outcomes, excellent or awful. The sales volumes for these two possible outcomes are 600,000 units and 100,000 units, and Acme assesses that their probabilities are 0.42 and 0.58. However, before making the ultimate decision, Acme has the option to hire a well-respected marketing research firm for $210,000. If Acme decides to use this option, the marketing research firm will predict that either "We think the market for this product will be excellent" or "We think the market for this product will be awful." Because Acme has used this firm before, it has a sense of the accuracy of the marketing firm's predictions. If the actual market is excellent, the prediction will be good with probability 0.8 and bad with probability 0.2. If the actual market is awful, the prediction will be bad with probability 0.7 and good with probability 0.3. If Acme does not hire this marketing research firm, it can then immediately decide whether to market the product. If it does, it has to wait for the firm's prediction. After the prediction is received, Acme can then make the ultimate decision on whether to market the product. However, when making this ultimate decision, Acme should definitely take the firm's prediction into account. Open the Precision Tree app to open Excel with Precision Tree loaded into it. Format cells A1 to D26 of the worksheet to look like the table below, and then transfer the information from the problem statement above to the worksheet. Enter formulas to compute net revenues. With your cursor on cell A30, click Decision Tree in the Precision Tree ribbon, and rename it "New Product Decision." Load each node with cell addresses. When finished, take a screenshot of it and upload it here: Choose File No file chosen. Use the information in the worksheet and the decision tree to answer the following questions. Record all probabilities in decimals (not percentages) using 2 decimal places for dollar-valued answers and four decimal places for all probabilities.
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