41. The Dragon Group owns a large store in Mumbai, which is rather old-fashioned and has declining profits.

The management of the company is considering some options, and three possibilities worked out:

(i) Shut down and sell the site for Rs 15 million.

(ii) Continue as before with profits declining at 10 per cent per annum.

(iii) Upgrade the store.

The group has had similar problems in the past and experience suggests that when stores are upgraded, 60 per cent achieve good results and 40 per cent poor results. Unsure, the management is considering whether to engage a leading market research company to carry out consumer research in Mumbai for Rs 1 million. It is known from the work record of the research company that the actual outcome has been good, where the aptitude predicted by it is good, with a probability of 0.85. Also, when its prediction has been negative, the actual outcome has been recorded as poor in 90 per cent of the cases and good in 10 per cent of them.

If the research indicates positive attitude, the management will consider deluxe upgrading that will generate more profit but will cost Rs 12 million, as compared with standard renovation costing Rs 6 million. On the other hand, if the research indicates negative attitude, then the management will consider standard renovation compared with shutting down and selling the site.

The time horizon for the analysis is 10 years and the following estimates ofreturns (in present value terms) have been made:

With deluxe upgrading:

Good results Poor results Rs 40 million Rs 20 million With standard renovation:

Good results Poor results Rs 25 million Rs 10 million If operations continue as before, returns next Year will be Rs 2 million in present value terms, falling by 10 per cent per annum in the subsequent Years.

Draw a decision-tree diagram and determine the optimal course of action for the group.