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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.
-If the firm learns that the complicated technology can be made more stable with a few tweaks increasing the cost by 5.5million and increasing the probability of a launch to 50%.Is it worth for the firm to invest the $500,000 in tweaks?
A)No,because it decreases the total expected value
B)Yes,because it increases expected value
C)No,because it increases risk
D)Yes,because tweaking is good

Question

​Use the following information for 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.
-​If the firm learns that the complicated technology can be made more stable with a few tweaks increasing the cost by 5.5million and increasing the probability of a launch to 50%.Is it worth for the firm to invest the $500,000 in tweaks?
A)​No,because it decreases the total expected value
B)Yes,because it increases expected value
C)No,because it increases risk
D)​Yes,because tweaking is good

Quizplus · Accepted Answer

Before tweaking, the expected value of the complicated software is:
Expected Value = (0.3 * $50million) - $10million = $5million
After tweaking, the expected value of the complicated software is:
Expected Value = (0.5 * $50million) - $15.5million = $9.5million
Therefore, the expected value of the complicated software increases by $4.5million ($9.5million - $5million) after tweaking. Since the cost of tweaking is $500,000, the net increase in expected value is $4million ($4.5million - $0.5million), which is greater than the cost of tweaking. Therefore, it is worth for the firm to invest in the tweaks. Answer B is correct.

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