Westward Magazine Publishers are thinking of launching a new fashion magazine for women in the under-25 age group. Their original plans were to launch in April of next year, but information has been received that a rival publisher is planning a similar magazine. Westward now have to decide whether to bring their launch forward to January of next year, though this would cost an additional $500 000. If the launch is brought forward it is estimated that the chances of launching before the rival are about 80%. However, if the launch is not brought forward it is thought that there is only a 30% chance of launching before the rival. For simplicity, the management of Westward has assumed that the circulation of the magazine throughout its life will be either high or low. If Westward launches before the rival, it is thought that there is a 75% chance of a high circulation. However, if the rival launches first, this probability is estimated to be only 50%. If the rival does launch first then Westward could try to boost sales by increasing their level of advertising. This would cost an extra $200 000, but it is thought that it would increase the probability of a high circulation to 70%. This increased advertising expenditure would not be considered if Westward's magazine was launched first. Westward's accountants have estimated that a high circulation would generate a gross profit over the magazine's lifetime of $4 million. A low circulation would bring a gross profit of about $1 million. It is important to note, however, that these gross profits do not take into account additional expenditure caused by bringing the launch forward or by increased advertising, For simplicity, you should ignore Westward's preference for money over time for example, the fact that they would prefer to receive a given cash inflow now rather than in the future. Draw a decision tree to represent Westward's problem. What is the expected value of not beating the rival if the launch is brought forward (in $m)? A 2.75 B 1.2 2.4 2.68 F) 1.25 What is the expected value of bringing the launch forward (in $m)? A 2.75 B 2 1.2 2.4 1.25 2.68 What is the expected value of not beating the rival if the launch is not brought forward (in $m)? A 2.9 B) 3.25 1.75 3.005 1.7 (F) 2.5 What is the expected value of not bringing the launch forward (in $m)? A 1.7 2.9 3.25 3.005 E 2.5 1.75 Assuming that Westward's objective is to maximize expected profit, what policy should be chosen? Based on the expected Monetary Value criterion, Westward should not bring the launch forward. If the rival launches first they should not increase their level of advertising. Based on the expected Monetary Value criterion, Westward should not bring the launch forward. If the rival launches first they should increase their level of advertising. Based on the expected Monetary Value criterion, Westward should bring the launch forward. If the rival launches first they should not increase their level of advertising. Based on the expected Monetary Value criterion, Westward should bring the launch forward. If the rival launches first they should increase their level of advertising. In reality, Westward has little knowledge of the progress which has been made by the rival. This means that the probabilities given above for beating the rival (if the launch is, or is not, brought forward) are very rough estimates. First, perform a sensitivity analysis on these probabilities and then determine if the following statement is true or false. "The chosen policy is totally insensitive to changes in these probabilities. Whatever estimate is used for the probability of beating the rival, the option decided in the previous step always leads to the highest expected profit." True False Westward Magazine Publishers are thinking of launching a new fashion magazine for women in the under-25 age group. Their original plans were to launch in April of next year, but information has been received that a rival publisher is planning a similar magazine. Westward now have to decide whether to bring their launch forward to January of next year, though this would cost an additional $500 000. If the launch is brought forward it is estimated that the chances of launching before the rival are about 80%. However, if the launch is not brought forward it is thought that there is only a 30% chance of launching before the rival. For simplicity, the management of Westward has assumed that the circulation of the magazine throughout its life will be either high or low. If Westward launches before the rival, it is thought that there is a 75% chance of a high circulation. However, if the rival launches first, this probability is estimated to be only 50%. If the rival does launch first then Westward could try to boost sales by increasing their level of advertising. This would cost an extra $200 000, but it is thought that it would increase the probability of a high circulation to 70%. This increased advertising expenditure would not be considered if Westward's magazine was launched first. Westward's accountants have estimated that a high circulation would generate a gross profit over the magazine's lifetime of $4 million. A low circulation would bring a gross profit of about $1 million. It is important to note, however, that these gross profits do not take into account additional expenditure caused by bringing the launch forward or by increased advertising, For simplicity, you should ignore Westward's preference for money over time for example, the fact that they would prefer to receive a given cash inflow now rather than in the future. Draw a decision tree to represent Westward's problem. What is the expected value of not beating the rival if the launch is brought forward (in $m)? A 2.75 B 1.2 2.4 2.68 F) 1.25 What is the expected value of bringing the launch forward (in $m)? A 2.75 B 2 1.2 2.4 1.25 2.68 What is the expected value of not beating the rival if the launch is not brought forward (in $m)? A 2.9 B) 3.25 1.75 3.005 1.7 (F) 2.5 What is the expected value of not bringing the launch forward (in $m)? A 1.7 2.9 3.25 3.005 E 2.5 1.75 Assuming that Westward's objective is to maximize expected profit, what policy should be chosen? Based on the expected Monetary Value criterion, Westward should not bring the launch forward. If the rival launches first they should not increase their level of advertising. Based on the expected Monetary Value criterion, Westward should not bring the launch forward. If the rival launches first they should increase their level of advertising. Based on the expected Monetary Value criterion, Westward should bring the launch forward. If the rival launches first they should not increase their level of advertising. Based on the expected Monetary Value criterion, Westward should bring the launch forward. If the rival launches first they should increase their level of advertising. In reality, Westward has little knowledge of the progress which has been made by the rival. This means that the probabilities given above for beating the rival (if the launch is, or is not, brought forward) are very rough estimates. First, perform a sensitivity analysis on these probabilities and then determine if the following statement is true or false. "The chosen policy is totally insensitive to changes in these probabilities. Whatever estimate is used for the probability of beating the rival, the option decided in the previous step always leads to the highest expected profit." True False