Essay
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 earn net profits of $60,000.What should the manager do?
Why?
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