A risk-averse manager is considering two projects. The first is to introduce a new product: the second is revamp the production facilities at the existing plant. There is 20 percent chance a rival will enter the market and an 80 percent chance it will not. If the rival enters, the firms will lose $20,000 if it introduces the new product, whereas revamping the production facilities will earn it $50,000 in profits. If the rival does not enter, the firm will earn $15,000 if it introduces the new product, and revamping the production facilities will earn new profits of $60,000. What should the manager do? Why?
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