Exercise for Treeplan and Sensit

Westward Magazine Publishers are thinking of launching a new fashion

magazine for women in the under-25 age group. Their original plans were to
launch in April of next year, but information has been received that a rival
publisher is planning a similar magazine. Westward now have to decide
whether to bring their launch forward to January of next year, though this
would cost an additional $500 000. If the launch is brought forward it is
estimated that the chances of launching before the rival are about 80%.
However, if the launch is not brought forward it is thought that there is only a
30% chance of launching before the rival.
For simplicity, the management of Westward has assumed that the circulation
of the magazine throughout its life will be either high or low. If Westward
launch before the rival, it is thought that there is a 75% chance of a high
circulation. However, if the rival launches first, this probability is estimated to
be only 50%. If the rival does launch first then Westward could try to boost
sales by increasing their level of advertising. This would cost an extra $200
000, but it is thought that it would increase the probability
of a high circulation to 70%. This increased advertising expenditure would not
be considered if Westwards magazine was launched first. Westwards
accountants have estimated that a high circulation would generate a gross
profit over the magazines lifetime of $4 million. A low circulation would bring
a gross profit of about $1 million. It is important to note, however, that these
gross profits do not take into account additional expenditure caused by
bringing the launch forward or by increased advertising.
1. Draw a decision tree to represent Westwards problem.
2. Assuming that Westwards objective is to maximize expected profit,
determine the policy that they should choose. (For simplicity, you
should ignore Westwards preference for money over time: for
example, the fact that they would prefer to receive given cash inflow
now rather than in the future.)
3. In reality, Westward have little knowledge of the progress which has
been made by the rival. This means that the probabilities given above
for beating the rival (if the launch is, or is not, brought forward) are
very rough estimates. How sensitive is the policy you identified in (b)
to changes in these probabilities?

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