Refer to the new product development example in the overview of this module. Suppose that there is a 60% probability that the product will be a success on the market (that means, the probability of failure is 40%). If the product is a success, you will get a profit of $200,000, and if it is a failure, you will incur a loss of $100,000. Should you develop this product? How do you make a decision in this situation? Also, how can one come up with the probability of success (or failure)?
Notes:
- Please keep in mind that a strong response to this question will consider both mathematical methods of evaluating both probability of success/failure outcomes and payouts of each outcome and qualitative analysis of the situation, noting the best decision in this situation with just information given and what other information you may need to acquire.
- As a hint, please consider looking up the concept of Expected Value.
- What else do you consider in this situation? Would having one investment opportunity vs. having 1,000 similar opportunities, all independent of each, and with the same payout, change your answer?