Question

A company is considering making a new product. They estimate the probability that the new product will be successful is 0.75. If it is successful it would generate $240,000 in revenue. If it is not successful, it would not generate any revenue. The cost to develop the product is $196,000. Use the profit (revenue-cost) and expend value to decide whether the company should make this new product

Answer 1

There's a 75% chance of 240,000 and a 25% chance of 0 so an expected value of

.75(240000) + .25(0) = $180,000

This is less than the cost of $196,000 so the company should not make this product.

Answer 2

Answer:

P = $240,000 – $196,000 = $44,000.

The expected value is a weighted average of each possible value weighted by its probability.

EV = ($44,000)(0.75) + ($–196,000)(0.25) = $–16,000.

The expect average profit is $–16,000.

The company should not make the product.

Step-by-step explanation:

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