Question

Global Studios 1s thinking of producing a megaflm, Aqua World, which could be s meganitoramegatop rons uncertain for two reasons: (1) the cost of producing the film may be low or high, and (2) the market reception for the film may be strong or weak. There is a .5 chance of low costs (C) and a 5 chance of high costs. The probability of strong demand (D) is .4; the probability of weak demand is.6. The studio's profits (in millions of dollars) for the four possible outcomes are shown in the table. Low C/Strong D Low c/Weak D High C/Strong D High C/Weak 80 10 0 -70 a.Should the studio produce the film? Use a decision tree to justify your answer. b. The studio is concerned that Kevin Costmore, the film's director and star, might let production costs get out of control. Thus, the studio insists on a clause in the production contract giving it the right to terminate the project after the first $30 million is spent. By this time, the studio will know for certain whether total production costs are going to be low (i.e., under control) or high (out of control). How much is this termination clause worth to the studio vis-à-vis the situation in part (a)?

Answer 1