Share
Explore BrainMass

Cost-benefit consideratins in developing cost information

I need help in figuring this problem out: JF Company is considering whether to undertake a new project but is unsure of the ultimate cost of the new project. The company estimates that the cost will be $150,000 with probability 0.4 and will be $200,000 with proability 0.6. The estimated revenues from the project are $170,000. JF can hire a consulting company that will indentify whether the actual cost will be $150,000 or $200,000. In other words, the information is perfect.

If JF does not hire the consulting company to determine the actual cost and would like to undertake the new project only if the expected value of the profit is positive, should the company undertake the project?

How much will JF be willing to pay to hire the consulting company to determine the actual cost?

Thank you very much for your help!

Solution Preview

Expected cost = 0.4*$150,000 + 0.6*200,000 = $180,000
Total Expected Profit = $170,000 - ...

Solution Summary

Brief calculations show how to calculate the maximum to be paid to hire a consulting company.

$2.19