A company has prepared the design for a new product. It can either sell the design, for
£100,000, or attempt to develop the design into a marketable product at a cost of £150,000.
If the company decides to develop the product, the chances of success are 0.7. If the
attempt fails the design can only be sold for £20,000. If the attempt succeeds the business
has the choice of either selling the design and developed product for £180,000 or marketing
the product. If the product is marketed then there is a 0.6 probability that the product
will generate a cash inflow of £800,000 and a 0.4 probability that it will generate a cash outflow
of £(100,000). Both figures exclude items previously mentioned.
Draw a decision tree and advise management as to their best course of action.
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