Question

Use the following information for questions 36-48

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 simplified version costs $2 million and its probability of success is 75%, whereas the cost of the complicated version is $10million, what is the minimum probability of success for the complicated version that would make the firm indifferent between the two software?

	a.	​0.32
	b.	​0.3
	c.	​0.33
	d.	​0.31

Answer 1

Complicated software has 30% chance of successful launch. The complicated software can give revenue of $50 million if launched.

So, with probably of 30% successful launch the complicated software can generate revenue of 30% of $50 million = $15 million.

The complicated technology costs = $10 million.

Net Benefit of Complicated software = $15 million - $10 million = $5 million.

Now voice activated software is simple and it has 80% chance of successful launch but it will generate revenue of $10 million if it success.

So, with probability of success of 80% , the voice activated software can generate revenue of 80% of $10 million = $8 million.

The cost of simple voice activated software is $2 million.

So, Net Benefit of Voice activated software = $8 million - $2 million = $6 million.

Therefore, Net Benefit complicated software is = $5 million

Net Benefit of Voice activated simple software is =$6 million

Now, if probability of success of simplified version is 75% and its cost is $2 million then Net Benefit under new probability (75%) of success will be -

Net Benefit with 75% success chance = 75% of $10 million - $2 million = $7.5 million - $2 million = $5.5 million.

Now the complicated version has the cost of $10 million and to become these two software be indifferent the Net Benefit of Complicated software should have $5.5 million.

Therefore, X of $50 million - $10 million = $5.5 million , (Where X is that such probability for which these two will be indifferent).

Or, X of $50 million = $10 + $5.5 = $15.5 million

Or, X = ($15.5 million)/($50 million)

Or, X = 0.31

Therefore, minimum probability of success for the complicated version would be 0.31 (Option - d) for which firm would be indifferent between two software. (Ans)