Question

A CD has a 5% chance of being a smash hit and profiting $5.2 million, a 50% chance of being a modest success and profiting $0.9 million, and a 45% chance of being a flop and breaking even. What is the expected earnings value of the CD?

Answer 1

Expected earnings value of the CD = 0.05* 5,000,000 + 0.50*900,000 + 0.45*0

Expected earnings value of the CD = 250,000+450,000 + 0 = $700,000 or $0.7 Million