Q1. A new product would cost Rs.200000 to develop.

Probability of successful development is

0.70. If successfully developed, the manufacturer must then decide whether the product will be
launched in the Bombay market or the New Bombay market. The probability that demand would
be high is estimated to be 0.40 and the probability that the demand would be low is estimated to
be 0.60. The incremental gross profits (i.e. before subtraction of Rs.200000/- development cost)
are as given below:
Mumbai market Navi Mumbai market
High demand Rs.700000 Rs.150000
Low demand Rs.100000 Rs.50000
Construct a decision tree and find whether the product should be developed. If yes, should it be
introduced in the Mumbai market or the Navi Mumbai market? (5)

Q2. The sales demand has been rising for a product and the problem confronting the
management is whether to install another automatic machine or place the employees on
overtime. After analysis, it was found that there is a 0.67 probability that sales would increase
by 25% and 0.33 chance that sales might drop by 5 %. A 25% increase in sales would result in
Rs. 350000 cash flow for the new equipment versus a Rs. 325000 cash flow for overtime. A
5% sales drop would generate a Rs. 200000 cash flow for new equipment versus a Rs. 280000
cash flow for overtime. Should the company go in for the new machine? Use decision tree.

Q3. A farm owner is planning to drill a farm well. He can decide to drill up to 200 feet for
which the chance of success is 0.4. In case if water is not available at 200 feet, he can decide
to drill up to 250 feet, for which the chance of success is 0.3. The cost of drilling is given as
Rs. 50 per foot. In case if water is not available at 250 feet, he will have to buy water from the
neighbour at a cost of Rs. 15000. Using a decision tree, find out the optimal decision for the
farm owner.