38. XYZ Company, dealing with a newly invented telephone device, is faced with the problem of selecting out of the following courses of action available:

(i) manufacture the device itself; or

(ii) be paid on a royalty basis by another manufacturer; or

(iii) sell the rights for its invention for a lump sum.

The profit (in Rs' 000s) which can be expected in each case and the probabilities associated with the level of sales are shown in the following table:

Represent the company's problem in the form of a decision tree. Redraw further the decision tree by introducing the following additional information:
1. If it manufactures itself and sales are medium or high, then company has the opportunity of developing a new version of its telephone.
2. From the past experience, the company estimates that there is a 50 per cent chance of successful development.
3. The cost of development is 15 and returns after deduction of development cost are 30 and 10 for high and medium sales, respectively.

Transcribed Image Text:

Outcome Probability Manufacture itself Royalties Sell all rights High sales 0.1 75 Medium sales 0.3 25 Low sales 0.6 -10 322 35 15 20 15 10 15