Javier Pena has always been interested in financing artistic projects. He has recently been offered two financing opportunities in the fashion industry: financing a new line of avant-garde youth fashions designed by Jorge Vera, and financing a line of business attire designed by Paolo Ricci. Javier has had a lot of past experience with these two designers, and has observed that 20% of Veras fashion lines are hits and 80% are misses. Furthermore, Riccis fashion lines are hits 30% of the time, and are misses 70% of the time.

Javiers net liquid assets amount to $750,000. As a result he can afford to finance at most one of the two fashion lines. However he does have the option of pre-testing at most one of the fashion lines at the upcoming design show in San Francisco, before deciding which, if any, fashion line he would like to finance for the entire U.S. market for the fall fashion season. The costs and revenue associated with the two fashion lines are given below:

Javier has observed, based on previous years, that of the avant-garde fashion lines that were hits nationwide, 80% were hits in the San Francisco pre-test; of the avant-garde fashion lines that were misses nationwide, 40% were hits in the San Francisco pre-test. Of the business attire fashion lines that were hits nationwide, 90% were hits in the San Francisco pre-test; of the business attire fashion lines that were misses nationwide, 60% were hits in the San Francisco pre-test. While Javier may find pre-test results useful, he knows the accuracy of this kind of test is not high enough to compel him in all cases to act in accordance with the pre-test results. In any event, Javier is willing to act on the basis of expected monetary values (i.e. maximize expected profit).

You have just been hired by Javier to help him analyze his problem so that he can decide what actions to take. He expects a relatively short report of your findings! Include:

What should Javier do in all possible situations?

How much money will he make on average?

What is Javiers potential maximum loss?

Note that this is a complicated problem. THINK and then do your analysis! Make sure that you include all possible actions. The sequencing of events is important. The cost structure (accounting) is a little complicated. The probabilities can get confusing.