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 expected value to decide whether the company should make this new product.

Question

Mathematics

Rylan Cochran

10 October, 16:32

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 expected value to decide whether the company should make this new product.

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Adam Tran · Answer 1

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.

Santiago Black · Answer 2

The company should make the product because they have a 75% chance of it working and they will only make $44,000 in profit because of the development cost