Question: Use a decision tree to determine the best introduction strategy for th

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Question: Use a decision tree to determine the best introduction strategy for the product from the standpoint of EMV. State the optimal policy and its EMV.

Q2: Product Rollouts Your firms has developed a new product aimed at the European and Asian markets. For each of these two markets, you have identified two possible sales scenarios, called "good" and "bad, with the following probabilities: Asia Good Asia Bad Europe Good Europe Bad 0.15 0.10 0.55 0.20 Page 1 of 2 That is, there is a 55% chance the products sales will be good in Asia and Europe, a 15% chance they will be good in Asia but bad in Europe, and so forth. You have four possible courses of action Introduce the product simultaneously in Europe and Asia Introduce in Asia first. After t becomes apparent whether sales are good or bad, decide whether to introduce it in Europe, one year later Introduce it in Europe first. After it becomes apparent whether sales are good or bad decide whether to introduce it in Asia, one year later Abandon the product. The NPV's of the various scenarios are as follows, in millions of US dollars: Immediate Introduction GoodBaGood Bad +120205 +105-200 After one year Asia Europe +117 205 +102-200 For example, "good" sales in Asia mean an NPV of $120 million if the product is introduced in this year, and S117 million in the product is introduced next year. In either year, "bad" sales mean an NPV of-$205 milion. The information for Europe should be interpreted similarly

Explanation / Answer

solution:

a) the probability of good sales in asia
i)
P(good sales in Asia)
= 0.55 +0.15 = 0.7
ii)the probability of good sales in europe
P(good sales in Euope)
= 0.55 +0.20
= 0.75

iii)the probability of good sales in asia given that good sales are observed in europe
P(good sales in Asia| good sales in Europe)
= P(good sales in Asia and good sales in Europe) /P(good sales in Europe)
= 0.55/0.75
= 11/15
iv)the probability of good sales in asia given that bad sales are observed in europe

P(good sales in Asia| bad sales in Europe)
= P(good sales in Asia and bad sales in Europe) /P(bad sales in Europe)
= 0.15/0.25
=0.6

v)the probability of good sales in europe given that good sales are observed in asia
P(good sales in Europe| good sales in Asia)
= P(good sales in Asia and good sales in Europe) /P(good sales in Asia)
= 0.55/0.7
=11/14
vi)the probability of good sales in europe giben that bad sales are observed in asia
P(good sales in Europe |bad sales in Asia)
= 0.2/0.3
=2/3

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