Question

A company is comparing two new product designs (design A and design B) based on their revenue potential. The revenue from design A is anticipated to be $2.5 million, by marketing department. But they find it difficult to accurately predict the potential revenue of design B. Marketing concludes that there is a probability of 0.3 that the revenue from design B will be $5 million and 0.3 probability that the revenue will be $4 million. But there are also risks of no revenue or even $1 million loss from this design with probabilities of 0.3 and 0.1, respectively. a) How much do you expect the long-term revenue of design B will be?

Answer 1

To find the expected long-term revenue of design B, each potential revenue is multiplied by its probability and then summed, resulting in an expected revenue of $2.6 million.

Step-by-step explanation:

To calculate the expected long-term revenue of design B, we need to use the concept of expected value. The expected value is calculated by multiplying each potential revenue by its probability and summing these products. For design B, the calculation would be as follows:

• $5 million × 0.3 probability = $1.5 million
• $4 million × 0.3 probability = $1.2 million
• $0 × 0.3 probability = $0
• -$1 million × 0.1 probability = -$0.1 million

The sum of these amounts gives the expected long-term revenue for design B:

$1.5 million + $1.2 million + $0 - $0.1 million = $2.6 million