An engineer at the Metal works is considering the introduction of a new line of

Question

An engineer at the Metal works is considering the introduction of a new line of products. In order to produce the new line, the company needs either a major or minor renovation of the current platn. The market for the new line of products could be either favorable or unfavorable, each with equal chance of occurrence. The company has the option of not developing the new product line at all. With major renovations, the company's payoff from a favorable market is $100,000, from an unfavorable market $-90,000. Minor renovation and favorable market has a payoff of $40,000 and an unfaborable market of $-20,000. Obviously, not developing the new product has a $0 payoff. Prior to making a final decision the company has contracted with a market researching group to conduct a market analysis to determine for certain if the market will be favorable or unfavorable. How much is the maximum amount the company should be willing to pay for this accurate information? (indicate to the nearest whole number)

Explanation / Answer

SEE THE ABOVE IMAGE AND EVALUATE THIS:-

a]EXPECTED PAYOFF IF THE NEW PRODUCT LINE IS STARTED:-

1]EXPETED PAYOFF FROM MAJOR INNOVATION WITH A FAVOURABLE MARKET = 0.5*0.5*0.5*100000 = 12500

2]EXPETED PAYOFF FROM MAJOR INNOVATION WITH A UNFAVOURABLE MARKET = 0.5*0.5*0.5*(-90000) = -11250

3]EXPETED PAYOFF FROM MINOR INNOVATION WITH A FAVOURABLE MARKET = 0.5*0.5*0.5*40000 = 5000

4]EXPETED PAYOFF FROM MINORINNOVATION WITH A UNFAVOURABLE MARKET = 0.5*0.5*0.5*(-20000) = -2500

total =3750

b]EXPECTED PAYOFF IF THE NEW PRODUCT LINE IS NOT STARTED = 0.5*0 =0

net expected pay-off = 3750+ 0 = $3750

The maximum amount the company should be willing to pay for this accurate information should not be more than $3750.

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