August
1997 QUESTION 4 Total Marks: 20 Marks |
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| 4. | The Millennium Company wishes to invent and market a new communication security software. Millennium has a choice of two different research and development plans: Plan A and Plan B. | ||
| Plan A costs $1 million and has a probability of 0.4 of succeeding. | |||
| Plan B costs $500,000 and has a probability of 0.3 of succeeding. | |||
| In the event of success Millennium has to decide whether to advertise the software aggressively or lightly. The software will either obtain full or partial market acceptance. | |||
| Aggressive advertising will cost $400,000 and gives a probability of 0.7 of full acceptance of the software | |||
| Light advertising will cost $100,000 and gives a probability of 0.5 of full acceptance of the software. | |||
| Full market acceptance of the software marketed is worth $4 million for Plan A, and $3 million for Plan B. Partial market acceptance is worth $2 million for both Plan A and Plan B. | |||
| (a) Draw the decision tree showing all of the possible decisions and outcomes, ensuring that you label your diagram clearly. Work out the value of each decision node in the diagram. | [14] | ||
| (b) Based on your analysis, explain clearly which plan and which level of advertising Millennium should adopt. | [3] | ||
| (c) Consider further the probability of failure. If you were the managing director of Millennium would you undertake the development of this software? Justify your answer. | [3] | ||