Question

Transcendent Technologies is deciding between developing a complicated thought-activated software, or a simple voice-activated software. Since the thought-activated software is complicated, it only has a 30% chance of actually going through to a successful launch, but would generate revenues of $50million if launched. The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million. The complicated technology costs 10million, whereas the simple technology costs 2million. What is the expected net profit from developing the complicated software? *

a) $15million

b) $8million

c) $5million

d) $50million

Please give the detailed explaination to your answer

Answer 1

If complicated software is launched successfully then the revenue will be = $50 million

Cost is = $10 million

Profit will be = $50 million - $10 million = $40 million

And the probability is = 30% = .3

If the software launch is unsuccessful then the loss will be = $10million

Probability is = 70% = .7

So,

Expect net profit = probability of success*profit + probability of unsuccessful * loss

                    = $40*.3 + (- $10* .7) = $5 million