The company that you manage has invested 5 million in develo

The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $2 million. If it would cost $4 million to finish development and make the product, you (should, should not???) go ahead and do so. The most you should pay to complete development is (????) million.

Solution

You should not go ahead. Because if you go ahead, total loss would be 5 million + (4 - 2) million, i.e., 7 million. And if you should not go ahead, your total loss would be 5 million.

The most you should pay to complete development is $2 million.