 a) FlyAir S.A. is a company that manufactures commercial aircraft. The company's board is looking for alternatives to improve sales. One of them is to launch an improved version of a plane that is currently on the market. The company commissioned a consultant to carry out a scenario analysis. He claims that the company will earn $800,000 if it decides to produce the plane and it is successful in the market. The firm will lose $500,000 if it decides to produce the new plane and sales expectations are not met. The probability that the new plane will be successful is 0.3. If the executive wants to take an action that brings the highest expected profit to the company, should he produce the new version?

Choices : Yes or No

To determine whether the company should produce the new version of the plane, we need to calculate the expected profit (or expected value) of producing the plane. The expected value (EV) takes into account the probabilities of different outcomes and their associated profits or losses.

Here's the calculation:

1. **Profit if Successful**: $800,000
2. **Loss if Unsuccessful**: -$500,000
3. **Probability of Success**: 0.3
4. **Probability of Failure**: $1 - 0.3 = 0.7$

The expected value is calculated as follows:

\[ \text{EV} = (\text{Profit if Successful} \times \text{Probability of Success}) + (\text{Loss if Unsuccessful} \times \text{Probability of Failure}) \]

Substitute the given values:

\[ \text{EV} = (800,000 \times 0.3) + (-500,000 \times 0.7) \]

Calculate each term:

\[ 800,000 \times 0.3 = 240,000 \]

\[ -500,000 \times 0.7 = -350,000 \]

Add these values:

\[ \text{EV} = 240,000 + (-350,000) \]

\[ \text{EV} = 240,000 - 350,000 \]

\[ \text{EV} = -110,000 \]

The expected value of producing the new version of the plane is $-\$110,000$.

Since the expected profit (or expected value) is negative, it indicates that, on average, the company will lose $110,000 if it decides to produce the new plane. Therefore, the executive should **not** produce the new version of the plane.

So, the correct answer is **No**.

Would you like more details or have any questions? Here are 5 additional questions you can ask:

1. How can sensitivity analysis be used to assess the decision to produce the new plane?
2. What are the implications of risk and uncertainty in decision-making for companies like FlyAir S.A.?
3. Can you explain how the decision would change if the probability of success increased to 0.5?
4. What are some other strategies FlyAir S.A. could consider to improve sales?
5. How does scenario analysis help companies in making strategic decisions?

**Tip:** In decision-making under uncertainty, calculating the expected value helps in understanding the average outcome, but considering risk tolerance and other qualitative factors is also crucial.

Explore the decision analysis for FlyAir S.A. on whether to produce an improved version of their plane. Calculate the expected profit considering probabilities of success and failure. Learn how to use expected value to make strategic business decisions.

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