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

Answer 1

-16000

Given P(success) = 0.75

Amount generated on success, X = 240000

P(not successful) = P(success)' = 1 - 0.75 = 0.25

Revenue generated, 0

Product development cost = 196000

Profit = Revenue - cost

When successful ; 240000 - 196000 = 44000

Unsuccessful ; 0 - 196000 = - 196000

x __________ 44000 _____ - 196000

P(x) _________ 0.75 _________ 0.25

The expected value ; E(X) = Σx * p(x) Σx * p(x) = (44000 * 0.75) + (-196000 * 0.25) = 33000 + - 49000 = - 16000 Hence, the company should not make the product

Step-by-step explanation:

edge 2021

Answer 2

-16000

Step-by-step explanation:

Given

P(success) = 0.75

Amount generated on success, X = 240000

P(not successful) = P(success)' = 1 - 0.75 = 0.25

Revenue generated, 0

Product development cost = 196000

Profit = Revenue - cost

When successful ; 240000 - 196000 = 44000

Unsuccessful ; 0 - 196000 = - 196000

x __________ 44000 _____ - 196000

P(x) _________ 0.75 _________ 0.25

The expected value ; E(X) = Σx * p(x)

Σx * p(x) = (44000 * 0.75) + (-196000 * 0.25)

= 33000 + - 49000

= - 16000

Hence, the company should not make the product