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John’s Coffee operates a chain of five star luxury coffee shops
Yorkshire. It is looking at two options to increase revenues. The estimated
impact of the two options on sales, their associated costs of each option, and
their probabilities are shown below. Construct a decision tree using the
|Launch loyalty card||cut prices|
|cost of option||$500,000||$300,00|
|probability of high sales||0.6||0.8|
|probability of low sales||0.4||0.2|
|result of high sales||$1,000,000||$800,000|
|result of low sales||$750,000||$500,000|
EMV of the launch loyalty card option
= (0.6x100000+0.4x750000) -500000 = 400000
EMV of cut prices
= (0.8x800000+0.2x500000 ) -30000 = 710000
Option 2 ( cut prices is better, as it has higher EMV
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