Marked Crafts is evaluating the launching of a new product. If the product becomes successful, the present value of future cash flows (excluding investment) is estimated at P2,000,000. If the product is not successful, the present value of this flow is estimated at P400,000. The required investment is P1,000,000.

REQUIREMENTS:

1. What are the probabilities that would have to be assigned to the events "success" and "not success" to make Marked Crafts indifferent between the two actions "invest" and "do not invest"? a. Probability of success______. b. Probability of not success_____.

2. If Marked Crafts thinks the probability of "success" is 60%, how much higher would be the expected value of the act "invest" over the expected value of the act "do not invest"?