6) The ABC Co. is considering a new consumer product. They believe that the XYZ

Question

6) The ABC Co. is considering a new consumer product. They believe that the XYZ Co. may come out with a competing product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is $40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of $100,000. For what value of probability that XYZ will offer a competing product will ABC be indifferent between the alternatives? 6) The ABC Co. is considering a new consumer product. They believe that the XYZ Co. may come out with a competing product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is $40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of $100,000. For what value of probability that XYZ will offer a competing product will ABC be indifferent between the alternatives? 6) The ABC Co. is considering a new consumer product. They believe that the XYZ Co. may come out with a competing product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is $40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of $100,000. For what value of probability that XYZ will offer a competing product will ABC be indifferent between the alternatives?

Explanation / Answer

Let X =probability XYZ offers a competing product.

Then:

EMV(assembly line)=$10,000X+$40,000(1-X)

EMV(addition) =-$100,000X+$600,000(1-X)

or:$10,000X+$40,000(1-X)=-$100,000*X+$600,000(1-X)

or:$10,000X-$40,000X+$40,000=-$100,000X-$600,000X$600,000

-$30,000X+$700,000X=$600,000-$40,000

$670,000X=$560,000

X=$560,000/$670,000=0.836

If the probability that XYZ will offer a competing product is estimated to be 0.836, then ABC will be indifferent

between the two alternatives. If the probability that XYZ will offer a competing product

is estimated to be less

than 0.836, then ABC should invest in the addition

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