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- Question 2 (25 points). Steinberg - Dietrich Productions (SDP) is trying to decide how to distribute its new movie Hidden Secrets of the MBA Pub. The movie has the potential of being a great financial success ("smash"), but the executives are not sure it will be, because the subject is controversial. And they have seen some films heralded as "smashes" become "flops" with disastrous financial consequences. The decision facing SDP is whether to put the film into distribution on a limited run basis, showing the movie in only a few select theaters for the first six months, or to saturate the market with wide distribution. If a limited run release is chosen and the film is critically acclaimed and well received by these audiences, positive word of mouth will build, and the film will eventually generate high profits. If the movie is poorly received, negative word of mouth will spread before wide distribution can be implemented, and big losses will occur. The payoff table below summarizes the profit or loss associated with the distribution alternatives. Eventual Level of Success of Film "Smash" "Flop" 20,000,000 -10,000,000 10,000,000 -2,000,000 Limited Run Release Wide Distribution Let P = management's assessment of the probability that the film will be a smash; let (1-P) = management's assessment of the probability that the film will be a failure. Full decision tree is provided on page 6. (4 points) a. If management believes that P = 0.75, which distribution alternative should they select? What will be the expected payoff? (4 points) b. Again, assuming that the probability of a "smash" is 0.75, what is the expected value of perfect information? (EVPT) (5 points) c. Management is not sure the probability of a smash is 0.75. Perform a sensitivity analysis on P to determine how changes in P change the optimal strategy. Answer either with a formula or graph. EMV 0.1 0.2 0.3 0.4 0.5 0.6 probability 0.8 0.9 0.7 1.0 (6 points) d. The marketing consulting firm has been used in the past to help assess the potential market with the following accuracy results: Predicted Success Predicted Failure Actual Smash 0.82 0.33 Actual Flop 0.18 0.67 That is, Probability (movie is a smash given they predicted success) = 0.82, Probability (movie is a flop given they predicted failure) = 0.67 The firm wants to charge $1 million for its report. Fill out the remaining information on the tree (page 6) and evaluate the tree to help SDP decide weather to hire this firm or not and how to proceed with the movie release. (6 points) e. What is the expected value of the information that the consulting firm will provide? (EVSI) What is SDP's optimal decision strategy and expected net profit