Question

A construction company plans to invest in a building project. There is a 30% chance that the company will lose $30,000, a 40% chance of a break even, and a 30% chance of a $60,000 profit. Based ONLY on this information, what should the company do?

The expected value is $9,000.00, so the company should proceed with the project.
B) The expected value is $18,000.00, so the company should proceed with the project.
C) The expected value is −$9,000.00, so the company should not proceed with the project.
D) The expected value is −$18,000.00, so the company should not proceed with the project.

Answer 1

Answer: Option 'A' is correct.

Explanation:

Since we have given that

30% chance that the company will lose $30000.

40% chance of a break even that there is no loss and no profit.

30% chance that the company will profit $ 60000.

As we know the formula for "Expectation":

So, Expected value will be

`(30)/(100)* (-30000)+(40)/(100)* 0+(30)/(100)* 60000\\\\=03* (-30000)+0.4* 0+0.3* 60000\\\\=-9000+18000\\\\=\$9000`

Expected value is $9000. So, the company should proceed with the project.

Hence, Option 'A' is correct.