Question

Transcendent Technologies is deciding between developing a complicated thought-activated software, or a simple voice-activated software. Since the thought-activated software is complicated, it only has a 30% chance of actually going through to a successful launch, but would generate revenues of $50million if launched. The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million. The complicated technology costs 10million, whereas the simple technology costs 2million.
What is the expected net profit from developing the complicated software? *

a) $15million

b) $8million

c) $5million

d) $50million

Answer 1

Answer:

c) $5 million

Explanation:

The computation of expected net profit is shown below:-

For computing the net profit first we need to compute the profit which is shown below:-

Profit = $50 million - $10 million

= $40 million

Expect net profit = Probability of success × Profit + Probability of unsuccessful × Loss

= $40 × 0.3 + (-$10 × 0.7)

= $5 million

Therefore for computing the expected net profit we simply applied the above formula.