ASSIGNMENT 02

Dorika is a leading comedian in Zambia. A movie producing company and a TV network both want exclusive rights to her latest comedy series. The TV network is willing to pay a single lump sum, but if she signed with the movie company, the sum she receives will depend on how the market responds to her series.

The network is willing to pay a flat fee K900,000-00. The movie company is prepared to pay K200,000-00, K1,000,000-00, and K3,000,000-00 for a Minimal Hit, Average Hit, and Massive Hit, respectively. The statisticians are forecasting a 30% probability of a minimal hit, 60% for an average hit, and a 10% for massive hit.

Dorika is considering seeking the advice of a Consultant. There is a 65% probability that the Consultants recommendation will be positive. If positive, the Consultant is forecasting a 25% probability of a Minimal Hit, 55% for an Average Hit, and a 20% for a Massive Hit. If negative however, the probabilities of the various states of success are 45% for a Minimal Hit, 50% for an Average Hit, and 5% for a Massive Hit. The Consultancy will cost K300,000-00.

Required:

Suppose you have been awarded the Consultancy, advise Dorika on the appropriate decision to make.

Your report should clearly identify the decision and chance nodes as well as explain the calculated expected pay-offs for each alternative option.

Total Marks: 20 Marks.

Due Date: 29^th November, 2018 (By mail).

Instructions: Use a Decision Tree for your analysis and attach the same to your report as an appendix.