decision tree

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Posted on February 22, 2022


Project Desciption

Harvey Publishing Company is considering the publication of a new book. The book will sell for $14 per copy. It will cost $2/copy to produce and ship the book. Royalties are $4/copy but paid only if a copy is sold. Initial (time 0) typesetting and setup costs are $10,000 regardless of the number of copies ultimately produced. If additional copies are needed in the future, the setup costs (time 1) will be $5,000. If the book gets good reviews (time 1), it is expected to sell 5,000 copies at time 1 and 10,000 copies at time 2. There is a 30% chance of a good review. If it gets bad reviews, sales will be 2,000 copies at time 1 and none thereafter. Unsold copies of the book have no salvage value. Sally Harvey, company president, faces a choice between ordering an immediate production run of 15,000 copies or ordering a production run of 5,000 copies now and 10,000 copies at time 1. Harvey uses a 10% discount rate for such investments. There are no taxes. Use a decision tree to recommend a suitable decision.

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