To: Finance Officer

Subject : Marketing campaign and CushyFit app

The SMT is planning a major 6-month promotional campaign to promote CushyFit, CushyStyle and our existing shoe ranges. There are three potential campaigns being considered and we need to decide which to choose. Each campaign is expected to have a different impact on the additional profit that will be generated depending on market reaction (Table 1 attached). I have calculated the expected value, standard deviation and coefficient of variation for each campaign (Table 2 attached). We have been offered perfect information about this decision for a fee of K$15,000 and so I have also calculated the value of perfect information (Table 3 attached). Sophia Grigg, Managing Director, has looked at Tables 1, 2 and 3 and has sent a list of queries. To address these queries please prepare a briefing paper for Sophia which explains :

  2. Based on the information in Tables 1, 2 and 3, how the risk attitude of the SMT will impact on its willingness to pay for the perfect information. [20 marks]

Table 1: Additional profit (after campaign costs) for each promotional campaign Campaign 1 K$000 Market reaction Good Average Poor Probability 0.3 0.5 0.2 Table 2: Decision-making information Expected value Standard deviation Coefficient of variation Table 3: The value of perfect information The value of perfect information Campaign 1 K$000 700 300 50 *This is before payment of the K$15,000 fee. 370 236 0.64 Campaign 2 K$000 KS000 Campaign 2 K$000 1,000 500 (50) 20 540 366 0.68 Campaign 3 K$000 900 400 (100) Campaign 3 K$000 450 350 0.78