Reference no: EM133283430

Case: A businessman is planning to launch a new line of business. He is still indecisive of whether to invest 1 million, 0.5million, or 0.25 million US dollars. However, the market study his team has conducted could not judge if the potential customers would demand that new product as planned or not. Therefore, he put the following options to make the best decision which allows him to maximize his profit:

1. If he invests 1 million $ and the demand was high he could make 100,000$ profit per year.2. If he invests 1 million $ and the demand was low he could make 50,000$ loss per year.3. If he invests 0.5 million $ and the demand was high he could make 50,000$ profit per year.4. If he invests 0.5 million $ and the demand was low he could make 25,000$ loss per year.5. If he invests 0.25 million $ and the demand was high he could make 25,000$ profit per year.6. If he invests 0.25 million $ and the demand was low he could make 10,000$ loss per year.

 1) Suppose now that the businessman is working in a risky environment where the high demand outcome has a probability of occurrence of 0.2 while the low demand outcome has 0.8. A marketing company has offered him a detailed study claiming that it could make him decide in complete certainty. However, that company asked him to pay 20,000$ in return; should he accept that offer given that the best EV is equal to 5,000$.