Your independent film production company owns the rights to a script for a rom-com movie. They...
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Your independent film production company owns the rights to a script for a rom-com movie. They estimate that the script would cost $30 million to make into a movie, which would have a 35% chance of being a hit. If the resulting movie becomes a hit, it would earn $50 million in revenue, and otherwise (if it is a "flop"), it would earn only $15 million in revenue. The company is considering hiring a script consultant to give her opinion of the script, but her services are expensive: she would charge $ 0.5 million to review the script. She will render an opinion of either "favorable" or "unfavorable". The company's experience is that the consultant rates rom-com scripts "favorable" 50% of the time, and scripts that she rates as "favorable" have a 60% probability of being hits. Scripts she rates as "unfavorable" have only a 10% chance of being hits. According to the EMV criterion, what should the production company do? Make the script into a film? Abandon the project? Or hire the script consultant and then decide? (If the company abandons the project, it will have no further revenue or costs.) In addition to finding the optimal policy and EMV for this problem, calculate the EVSI of hiring the script consultant. Also, calculate the EVPI in this situation. Show your work in arriving at each number. Your independent film production company owns the rights to a script for a rom-com movie. They estimate that the script would cost $30 million to make into a movie, which would have a 35% chance of being a hit. If the resulting movie becomes a hit, it would earn $50 million in revenue, and otherwise (if it is a "flop"), it would earn only $15 million in revenue. The company is considering hiring a script consultant to give her opinion of the script, but her services are expensive: she would charge $ 0.5 million to review the script. She will render an opinion of either "favorable" or "unfavorable". The company's experience is that the consultant rates rom-com scripts "favorable" 50% of the time, and scripts that she rates as "favorable" have a 60% probability of being hits. Scripts she rates as "unfavorable" have only a 10% chance of being hits. According to the EMV criterion, what should the production company do? Make the script into a film? Abandon the project? Or hire the script consultant and then decide? (If the company abandons the project, it will have no further revenue or costs.) In addition to finding the optimal policy and EMV for this problem, calculate the EVSI of hiring the script consultant. Also, calculate the EVPI in this situation. Show your work in arriving at each number.
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Making Hard Decisions with decision tools
ISBN: 978-0538797573
3rd edition
Authors: Robert Clemen, Terence Reilly
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