Answer:
SYSTEM A
Explanation:
Given the following :
First option :
Skip design = No net gain or loss
System A:
Additional sales of $50,000 under good condition
Additional sales of $10,000 under bad condition
System B:
Increase sale by $20,000 under both good and bad condition
Cost of system development = $25,000
Good condition are twice as likely to occur as bad condition
Hence, we have : good, good, bad
Probability of good = 2/3 = 0.667
Probability of bad = 1/3 = 0.333
We can calculate the Expected monetary Value of the three options :
First option:
Skip design : Expected monetary Value = $0
Second option (SYSTEM A) :
Profit from good condition :
Additional sales - system cost = ($50,000 - $25,000) =$25, 000
Loss from bad condition :
($25,000 - $10,000) = - $15,000
Expected monetary value:
(0.667 * 25000) + (0.33 * - 15000)
$16675 - $4950
= $11,680
Third option (SYSTEM B) :
Additional sales - system cost
$20,000 - $25,000 = - $5,000
From the expected monetary value obtained for the three options, System A is the best option with $11,680
