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

Answer:

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.

Step-by-step explanation:

ED

Answer 2

Using the expected value of a discrete distribution, it is found that the company should not make the product.

What is the expected value of a discrete distribution?

The expected value of a discrete distribution is given by the sum of each outcome multiplied by it's respective probability.

In this problem:

• They estimate the probability that the new product will be successful is 0.75, having a revenue of $240,000 - $196,000 = $44,000.

• 0.25 probability of being a failure, with a revenue of -$196,000.

Hence, the distribution is:

$P(X = 44000) = 0.75$

$P(X = -196000) = 0.25$

The expected value is:

$E(X) = 0.75(44000) - 0.25(196000) = -16000$

Since the expected value is negative, the company should not make the product.

You can learn more about the expected value of a discrete distribution at https://brainly.com/question/24855677