Benjamin Moses chief engineer of Offshore Chemicals Inc must

Benjamin Moses, chief engineer of Offshore Chemicals, Inc., must decide whether to build a new processing facility based on an experimental technology. If the new facility works, the company will realize a net profit of $1515 million. If the new facility fails, the company will lose $1717 million. Benjamin\'s best guess is that there is a 3030 percent chance that the new facility will work. What decision should Benjamin Moses make?

Solution

expected value of new facility will work = 15 million * 30%

= 4.5 million

expected value of new facility doesnt work = 17 million * 70%

= 11.9 million

expected payoff from facility = 4.5 million - 11.9 million

= -7.4 million

Hence he should not take the project