Electronics manufacturer SE must decide whether or not to invest in the developm

Question

Electronics manufacturer SE must decide whether or not to invest in the development of a new type of battery. If the development succeeds, the market for the battery may be large or small. If it doesn't succeed, the development efforts may or may not generate minor innovations that would offset some of the battery's development costs. The tree below summarizes the decision. 23. The EMV of developing the new battery is $300,000. Based on EMV, SE should develop the battery. If the manager chooses not to develop the battery, which of the following best describes the managers attitude towards this decision? ORisk averse Risk neutral ORisk seeking Cowardly $2.700 EMV: $1,500,000 50% EMV: $300,000 Small Market $300 50% Develop EMV:-$500,00o Valuable Innovations 60% Failure 60% 50

Explanation / Answer

Sol: A risk averse investor prefers lower returns with known risks rather than higher returns with unknown risks. In this case, not developing the battery is an option of lower risk with no return, compared to the option of developing the batter which gives high returns but with a probabiltiy of only 0.4. SO, (a) is the most feasible option.

Clearly, (b) and (c) cannot be the possible options as the manager did not invest in making the battery.

Cowardly might not appropriate as a the finance term and not a very approving term.

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