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.

Explanation:

Step1: Calculate profit if successful

Profit when successful = Revenue - Cost. Revenue = $240000$, Cost = $196000$. So, profit when successful = $240000 - 196000=44000$.

Step2: Calculate profit if not successful

Profit when not successful = $0 - 196000=- 196000$.

Step3: Calculate expected value

The probability of success $p = 0.75$, and the probability of not - success $q=1 - 0.75 = 0.25$. The expected value $E$ of the profit is given by $E=p\times(\text{Profit when successful})+q\times(\text{Profit when not successful})$. Substitute the values: $E = 0.75\times44000+0.25\times(-196000)$. First, $0.75\times44000 = 33000$, and $0.25\times(-196000)=-49000$. Then $E=33000-49000=-16000$.

Answer:

The company should not make the new product since the expected value of the profit is -$16000$.