Question

A business has an opportunity to invest $35,000. If the investment is a success, the business earns a profit of $150,000. Otherwise, the investment will result in a total loss of all monies. If the investment has 0.27 chance of success, which equation correctly models the expected value of this investment?

Answer 1

the total expected value of the investment is given by:

0.27(150,000 - 35,000) + 0.73(-35,000)

The net value is:

5500.

Explanation:

A business has an opportunity to invest $35,000.

If the investment is a success, the business earns a profit of $150,000.

The probability of success=0.27.

Hence, the value (in this case profit) of the business would be $150,000 (pure profit) minus the $35,000 (initial investment). Multiplying, you get =0.27(150,000 - 35,000).

Also the probability of failure=1-0.27=0.73

Hence, The value would now be $0 (pure profit) minus the original investment for a total of - $35,000. Multiplying, you get:

= 0.73(-$35,000).

Now the total expected value of the investment is given by:

0.27(150,000 - 35,000) + 0.73(-35,000)

on solving we get:

=0.27×115000-25550

=31050-25550

=5500.