Namibia Records (NR) is a music production and promotion studio. They are currently considering launching a new pop group, Namjams. If Namjams is launched without further research being carried out, the demand for their records and the present value of profit earned from record sales is estimated as follows:

Demand Probability Present value of profit (N$000)

High 0.50 800

Medium 0.20 100

Low 0.30 (300)

NR can improve their forecast of the outcome by undertaking a

market research. The research will inform NR of the forecast either being a

successful or unsuccessful career for Namjams. The probability of an

unsuccessful career is 30%. If the research is commissioned, the demand for

Namjams records can be high, medium or low. The following table presents the

details of demand under the two forecast market research results:

Demand

High Medium Low

Successful career 0.70 0.10 0.20

Unsuccessful career 0.10 0.30 0.60

Note: If for example, the research indicates a successful career

for Namjams, the probability that there will a low demand will be 0.2

The survey would cost N$50 000.

Requirement

3.1 Calculate the expected present value of profit to NR if no

research is commissioned

3.2 Using a decision tree to illustrate the choices available to

NR, explain whether or not NR should commission the research.

Note: The decision tree should be drawn following the correct

decision tree principles i.e. flowing from left to right and representing

decision points with a rectangle and outcomes with a circle