Question
Wynn Corporation is considering developing a new product to replace a current one . If they elect to stick with the current product they can
Wynn Corporation is considering developing a new product to replace a current one. If they elect to stick with the current product they can anticipate a profit of $1,200,000. It will cost $200,000 to attempt to develop the new product. If the development is highly successful (25% chance) they will introduce the new product to the market with an anticipated profit of $1,800,000 (not counting the development cost). If the development is not successful (30% chance) Wynn would return to the current product. A third outcome is that the development could be moderately successful (with probability equal to 1- the other two probabilities). This would result in uncertain demand for the new product. In this scenario Wynn would have to decide whether to introduce the new product to the market or keep the current one. If Wynn introduces the new product there is a 60% chance of the high demand that would result in the same $1,800,000 profit described above. But it is also possible (with probability of 1- the probability of high demand)) that, following only moderately successful development, the demand for the new product will be low and generate a profit of only $600,000
Create a decision tree that will help determine whether Wynn should develop the new product and assuming they decide to develop the product, and whether they should introduce it to the market.
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