Successful Broadway productions such as The Phantom of the Opera can be very profitable, but most...
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Successful Broadway productions such as The Phantom of the Opera can be very profitable, but most lose money. A show could open directly on Broadway, with three possible outcomes: a hit would have a net profit of $30 million, a solid show would earn $10 million, and a bomb would lose $50 million. The producer's best estimates are that the probabilities of these outcomes are o.3, o.5, and o.2 respectively. What is the expected profit of a direct Broadway opening? An alternative is to test the show first in Boston, at a cost of $7 million. If the show is well received (probability 0.35), then only minor changes are needed and Broadway profits can be expected to be $24 million; if the show has definite kinks (p=o.45), considerable reworking will be needed, yielding a Broadway profit of $12 million. And if the production has major problems in Boston, then it is better not to open on Broadway (so the company only loses $7 million). What is the expected profit from previewing the show in Boston? Is this investment in information more profitable than opening on Broadway directly? Explain/justify your answer. а. b. Successful Broadway productions such as The Phantom of the Opera can be very profitable, but most lose money. A show could open directly on Broadway, with three possible outcomes: a hit would have a net profit of $30 million, a solid show would earn $10 million, and a bomb would lose $50 million. The producer's best estimates are that the probabilities of these outcomes are o.3, o.5, and o.2 respectively. What is the expected profit of a direct Broadway opening? An alternative is to test the show first in Boston, at a cost of $7 million. If the show is well received (probability 0.35), then only minor changes are needed and Broadway profits can be expected to be $24 million; if the show has definite kinks (p=o.45), considerable reworking will be needed, yielding a Broadway profit of $12 million. And if the production has major problems in Boston, then it is better not to open on Broadway (so the company only loses $7 million). What is the expected profit from previewing the show in Boston? Is this investment in information more profitable than opening on Broadway directly? Explain/justify your answer. а. b.
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There are three outcomes of the show opening directly on Broadway Hit Show30 million probability03 S... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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