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  3. 3) steppenwolf theatrical company is considering t

3) Steppenwolf theatrical company is considering taking one of its two musicals, on tour. In...

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Finance

3) Steppenwolf theatrical company is considering taking one of its two musicals, on tour. In order to take a musical on tour, it has to first hire a director at a cost of $1.8 million. Once a producer is hired, it has two options. (1) Produce the well-known musical Aida It has made the following calculations

  • The tour would cost $9.2 million
  • There is a .82 chance that it will earn $11.1 million and a .18 chance it will earn $7.75 million.

Alternatively, (2) choose a new musical Music Man. It has made the following estimates,

  • The tour would cost $8 million

Since Music Man is relatively unknown, hiring a PR firm to promote it can increase the probability that it will do well. If the PR firm is hired at a cost of 1.05 million and the musical is promoted then,

  • There is a .81 chance that it will earn $9.9 million and a .19 chance it will earn $6.8 million.

If the PR firm is not hired then,

  • There is a .62 chance that it will earn $9.9 million and a .38 chance it will earn $6.8 million.

a. Draw the decision tree for this problem.

b. Calculate the expected values and determine the best decision for Steppenwolf

Hint: Have a look at the Decision Tree examples in the Decision Analysis folder.

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