Question

26. The Monroe Corporation wants to develop a new process that will reduce its costs. There are two ways to go about developing such a process. There is a 0.5 probability that it will cost $5 million to develop the process, and a 0.5 probability that it will cost $3 million to do so. If the two approaches can be run in parallel, and if the true cost of development using each approach can be determined after spending $100,000 (i.e., this is "C"), what is the expected cost? a. $2,150,000 b. $3,380,000 c. $3,460,000 d. $3,600,000 e. none of the above 1.25

Answer 1

The expected cost can be calculated by the formula EDC & PuxCH +PxQ where I probability that the cost will be higher The higher cost amount. P.: probability that the cost will be lower a the lower cost amount. EDC : expected development cost. i EDC-(0.5x65) + (0.5*33) 82.5 million + $115 million 84 million. If the two approaches are run in parallel the chance that the development cost of each approach equals 85 million is 25 percent (0.5x0.5) s the chance that the development cost of each approach equals 83 million us 25 percent (0.5x05) Thus, we have 50 percent chance that one of the hog approaches has & 3 million development cost [Co.5 10.5) + (asxois)

percent geling $ 3 million for any Ultimately we have 15 percent chance that the development equals 43 million. This is by adding adding the sopercent chance both of the approach haring & 3 million and the 25 any one of the approach Now, in the actual development cost can be determined only after spending $100,000 Then expected development cost EDC (PXC) + ((, x P) + c Given C - $100.000 .. EDC - (0.25x45 million) + (0.15 x $3million) +$100,000 = $1.25 million +$2.25 million + $0.1 million = $3.6 million. The answer in (d) $3,600,000