Decision tree: The manager for a growing firm is considering the launch of a new

Question

Decision tree: The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success. For $120,000, the manager can conduct a focus group that will increase the product's chance of success to 70 percent. Alternatively, the manager has the option to pay a consulting firm $400,000 to research the market and refine the product. The consulting firm successfully launches new products 90 percent of the time. If the firm successfully launches the product, the payoff will be $1.2 million. If the product is a failure, the firm will receive $0. Which action will result in the highest expected payoff to the firm?

Explanation / Answer

For $120,000, the manager can conduct a focus group that will increase the product's chance of success to 70 percent.

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