Calculate expected value of this decision

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Reference no: EM133945077

Question

As an investor, you are presented with opportunity to invest $5,000 (numbers are in thousands) into a start-up, which is currently approaching market entry. At this time, you do not know what type of demand will occur, but you estimate that there is a 45% of high demand, 35% of moderate demand, and 20% of low demand. The payoffs (present value without accounting for initial investment) are $6,000, $4,500, and $1,000 respectively. Once you make your decision and observe the demand, you have an option to invest additional $200 into the marketing campaign to boost the demand. The payoffs (present value without accounting for initial investment) of investing in marketing efforts are $10,000, $5,500, and $2,000 for high, medium, and low demands respectively. Also, if you decide to invest in this venture, you can always liquidate it once you see what demand has occurred for $4,000.

1. Draw a decision tree that illustrate your decision process

2. Calculate expected value of this decision

3. Based on expected value, outline specific steps you would take.

Reference no: EM133945077

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