question b

Protect Lrd is an Australian leisure clothing company. It imports materials from Asia to produce high quality clothing used by walkers and joggers. It has a large share of the domestic market, but in recent years also exported to Europe. These exports now represent 60% of all sales revenues. The researeh and development department has invented a new lightweight, breathable waterproof fabric. Initial primary and secondary market research has shown very positive results from existing customers and identified potential applieations to a range of sports markets. To manufacture new gaments using this fabric, Protect Lrd will need new manufacturing equipment. The research and development department believe that it can improve the fabric further to provide the strength necessary for contact sports such as rugby and American football. The board of directors recently identified three potential strategic options: 1. As the sports market is highly competitive, sell the patent for the new fabric to a leading sportswear manufacturer for $10 million. 2. Purchase machinery at a cost of $2 million to manufacture the new fabric as outdoor clothing. The estimated success of this option is $0% with returns of $20 million. However, the failure of the product in the market place would result in a loss of $5 million. 3. Conduct further research and development into improving the fabric for sports use. This would cost $2 million. Failure to produce a suitable fabric would result in a loss of $5 million. However, it is believed that there is a 60% chance of success. If a suitable fabric is produced then the firm would have another choice. They could either sell the patent for the improved fabric for $25 million, or choose to manufacture it themselves at a cost of $2 million. If they choose to manufacture, the estimated chance of a suecessful market launch is 50% with estimated returns of 572 million. However, if the market launch proves a failure, they would make a loss of $8 million. The board of directors are concemed about the economic conditions in Europe, with the expectation of increases in inflation and interest rates. Asian currency markets are also volatile with Asian exchange rates expected to rive. (a) Define the temu primary market nesearch. [2 marks] (b) Prepare a decision tree to show the taree options available to Protect Lrd. the expected values of each, and identify the most profitable option. [s marks]