Question

John’s Coffee operates a chain of five star luxury coffee shops in
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
information.

	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

Answer 1

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