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