Question

In: Statistics and Probability

"Jay, a writer of novels, just has completed a new thriller novel. A movie company and...

"Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network both want exclusive rights to market his new title. If he signs with the network, he will receive a single lump sum of $980,000, but if he signs with the movie company, the amount he will receive depends on how successful the movie is at the box office.
The probability of a small box office earning $295,000 is 0.25. The probability of a medium box office of $1,210,000 is 0.49, and the probability of a large box office of $3,180,000 is 0.26.
Jay can send his novel to a prominent movie critic to assess the potential box office success. It will cost $24,000 to get the novel evaluated by the movie critic.
The movie critic can have either a favorable or unfavorable opinion. The movie critic's reliability of predicting box office success is as follows.
If the movie will have a large box office, there is a 0.63 probability the critic will have a favorable opinion.
If the movie will have a medium box office, there is a 0.41 probability the critic will have a favorable opinion.
If the movie will have a small box office, there is a 0.11 probability the critic will have a favorable opinion.
Assume that Jay wants to maximize his expected monetary outcome. Enter the expected value of the preferred alternative. This includes whether or not to hire the movie critic and whether or not to go with the movie or network option."

Solutions

Expert Solution

Hence we can conclude that Jay can maximize his profit by not hiring a critic and signing with movie company. In this case the expected profit $1,493,450.


Related Solutions

"Jay, a writer of novels, just has completed a new thriller novel. A movie company and...
"Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network both want exclusive rights to market his new title. If he signs with the network, he will receive a single lump sum of $930,000, but if he signs with the movie company, the amount he will receive depends on how successful the movie is at the box office. The probability of a small box office earning $201,000 is 0.35. The probability...
Your company has just completed a $0.85 million marketing survey that found that your new product...
Your company has just completed a $0.85 million marketing survey that found that your new product is going to be a big hit. Producing the game will require an immediate (year 0) $0.9 million capital investment. Net working capital will have to increase in year 0 from $0.5 million to $1million, and will return to the original 0.5 million level at the end of the project. You expect annual revenues of $5 million in years 1 through 3. The variable...
Snow Inc. has just completed development of a new cell phone. The new product is expected...
Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to decrease by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating...
Snow Inc. has just completed development of a new cell phone. The new product is expected...
Snow Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,400,000. Producing the cell phone requires an investment in new equipment, costing $1,500,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to decrease by $200,000, which Snow will recover by the end of the new product’s life cycle. Annual cash operating...
Holland Inc. has just completed development of a new cell phone. The new product is expected...
Holland Inc. has just completed development of a new cell phone. The new product is expected to produce annual revenues of $1,350,000. Producing the cell phone requires an investment in new equipment, costing $1,440,000. The cell phone has a projected life cycle of 5 years. After 5 years, the equipment can be sold for $180,000. Working capital is also expected to increase by $180,000, which Holland will recover by the end of the new product’s life cycle. Annual cash operating...
The Duncan Company has just completed a number of budgets for the coming year. The cost...
The Duncan Company has just completed a number of budgets for the coming year. The cost of goods manufactured schedule, the proforma income statement and the balance sheet still have to be completed. The following information is available: Prior year Balance Sheet: Cash $35,000 Accounts Payable $98,000 Accounts Receivable 45,000 Other Current Liabilities 39,000 Materials Inventory 35,000 Income Taxes Payable 21,000 WIP Inventory 25,000 Finished Goods Inventory 32,000 Long-Term Debt 250,000 Prepaid Expenses 15,000 Plant and Equipment 450,000 Common Stock...
TML Smoothie Company has just completed a $10,000 feasibility study and decided to go with the...
TML Smoothie Company has just completed a $10,000 feasibility study and decided to go with the exercise fad and plans to open an exercise facility in conjunction with its main smoothie and health food store.    TML Smoothie will rent additional space adjacent to its current store. The equipment required for the facility will cost $50,000. In addition, it must pay $5,000 in cash to cover the costs of shipping and installation of the equipment. This equipment will be depreciated...
Batman Enterprises has just completed an initial public offering. The firm sold 500,000 new shares (the...
Batman Enterprises has just completed an initial public offering. The firm sold 500,000 new shares (the primary offering). In addition, existing shareholders sold 300,000 shares (the secondary issue). The new shares were offered to the public at $18.50 per share and underwriters received a spread of $1.00 a share. The legal, administrative, and other costs were $50,000 and were split proportionately between the company and the selling stockholders. How much money did the company receive before paying its proportion of...
Superman Enterprises has just completed an initial public offering. The firm sold 800,000 new shares (the...
Superman Enterprises has just completed an initial public offering. The firm sold 800,000 new shares (the primary offering). In addition, existing shareholders sold 325,000 shares (the secondary issue). The new shares were offered to the public at $14.50 per share and underwriters received a spread of $1.21/share. The legal, administrative, and other costs were $175,000 and were split proportionately between the company and the selling stockholders. The amounts a company receive is $10632000. Suppose that on the first day of...
Call Systems Company, a telephone service and supply company, has just completed its fourth year of...
Call Systems Company, a telephone service and supply company, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the company is considering changing to the allowance method. Information is requested as to the effect that an annual provision of 1% of sales would have had on the amount of bad debt expense...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT