Question

Lenovo is considering the manufacture of a new laptop. An analyst estimates the probability that the new laptop is successful is 0.85. If the Laptop is successful it would generate profits of $2,000,000 and if it not successful it would generate profits of $500,000. The development costs for the laptop are $900,000. Should Lenovo proceed with plans for the new laptop? Why or why not?

a) No, because the probability of the laptop being successful is not high enough.

b) No, because if the laptop is not successful the company will have a loss of $900,000.

c) Yes, because the expected profit is $875,000

Answer 1

Probability that the new laptop is successful = P(Successful) =  0.85

Probability that the new laptop is not successful = P(Not Successful) = 1 - P(Successful) = 1 - 0.85 = 0.15

Expected Profit = P(Successful) * Profit when Successful + P(Not Successful) * Profit when Not Successful

= 0.85 * $2,000,000 + 0.15 * $500,000

= $1775000

Development costs = $900,000

Overall expected profit = $1775000 - $900,000 = $875000

Since the overall expected profit is greater than 0, Lenovo should proceed with plans for the new laptop.

c) Yes, because the expected profit is $875,000