Asked by Grant Friesen on May 10, 2024
Verified
If the simplified version costs $2 million and its probability of success is 75%,whereas the cost of the complicated version is $10million,what is the minimum probability of success for the complicated version that would make the firm indifferent between the two software?
A) 0.3
B) 0.31
C) 0.32
D) 0.33
Simplified Version
An easier or less complex form of something, often used to aid understanding or analysis.
Minimum Probability
The lowest chance or likelihood of an event occurring, often used in statistical analysis and decision-making processes to evaluate risk.
Costs
The expenses incurred in the production of goods or services, including materials, labor, and overhead.
- Evaluate strategic decisions by considering probabilistic outcomes and cost implications.
Verified Answer
Expected revenue from complicated version = Expected revenue from simple version
0.3($50 million) - $10 million = 0.75($10 million) - $2 million
Solving for the probability of success for the complicated version:
0.3($50 million) - $10 million = 0.75($10 million) - $2 million
$5 million - $10 million = $7.5 million - $2 million
-$5 million = $5.5 million
-1 = 0.55
Therefore, we need the probability of success for the complicated version to be at least 0.31 (or 31%) to make the firm indifferent between the two options. Since this is higher than the given probability of 0.3, the best choice would be to develop the simple voice-activated software with a probability of success of 80%.
Learning Objectives
- Evaluate strategic decisions by considering probabilistic outcomes and cost implications.
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