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