10.

A risk-averse manager is considering two projects. The first is to introduce a new product; the second is to

revamp the production facilities at the existing plant. There is a 20 percent chance a rival will enter the market and

an 80 percent chance it will not. If the rival enters, the firm will lose $20,000 if it introduces the new product,

whereas revamping the production facilities will earn it $50,000 in profits. If the rival does not enter, the firm will

earn $15,000 if it introduces the new product, and revamping the production facilities will earn net profits of

$60,000. What should the manager do and why? Explain and show your work. (8)

10. A risk-averse manager is considering two projects. The first is to introduce a new product; the second is to revamp the production facilities at the existing plant. There is a 20 percent chance a rival will enter the market and an 80 percent chance it will not. If the rival enters, the rm will lose $20,000 if it introduces the new product, whereas revamping the production facilities will earn it $50,000 in prots. If the rival does not enter, the rm will earn $15,000 if it introduces the new product, and revamping the production facilities will earn net prots of $60,000. What should the manager do and why? Explain and show your work. (8)