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expected profits of introducing a new product

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A risk-averse manager is considering two projects. The first is to introduce a new product; the second is to revamp the production facilities at the existing plant. There is a 20 percent chance a rival will enter the market and an 80 percent chance it will not. If the rival enters, the firm will lose $20,000 if it introduces the new product, whereas revamping the production facilities will earn it $50,000 in profits. If the rival does not enter, the firm will earn $15,000 if it introduces the new product, and revamping the production facilities will net profits of $60,000. What should the manager do? Why?

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The expected profits of introducing a new product are weighed in this solution.

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The expected profits of introducing a new product are .2(-$20,000) + .8($15,000) = $8,000. The expected profits of revamping the production facilities at the existing plant are given by ...

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