Question

CFL Corporation is a civil engineering company that makes traffic lights. The company must decide whether to (a) spend money to expand their existing business, or (b) to invest in a new product line of smart traffic lights, or (c) to do nothing. If the company expands its existing business, there is a 40% chance they will increase their market share, resulting in a profit increase of $2,500,000; and a 60% chance they will face stronger competition from their competitors, resulting in a profit decrease of $800,000. If the company invests in a new product line, there is a 50% chance of success, resulting in a profit increase of $1,800,000; and a 50% chance of failure, resulting in profit decrease of $600,000. If the company does nothing, there is a 40% chance that its market share will increase anyway, resulting in a profit increase of $1,000,000; and a 60% chance of new competitive threats, resulting in a profit decrease of $400,000. Which decision will lead to the highest Expected Monetary Value (EMV)?

a. No answer text provided.
b. Invest in a new product tine
c. Do nothing
d. Expand the existing business

Answer 1

The decision that leads to the highest Expected Monetary Value (EMV) for CFL Corporation is to invest in a new product line of smart traffic lights, which has an EMV of $600,000.

Step-by-step explanation:

To determine which decision will lead to the highest Expected Monetary Value (EMV), we can calculate the EMV for each option CFL Corporation is considering. EMV is calculated as the sum of the possible outcomes, each weighted by its probability of occurrence.

For expanding the existing business:

• (0.40 * $2,500,000) + (0.60 * -$800,000) = $1,000,000 - $480,000 = $520,000

For investing in a new product line of smart traffic lights:

• (0.50 * $1,800,000) + (0.50 * -$600,000) = $900,000 - $300,000 = $600,000

For doing nothing:

• (0.40 * $1,000,000) + (0.60 * -$400,000) = $400,000 - $240,000 = $160,000

After calculating the EMV for each option, we can see that investing in a new product line of smart traffic lights has the highest EMV at $600,000, making it the best financial decision for CFL Corporation according to this analysis.