Question

RJ wants to invest his money in a fast food restaurant. There is a 38% chance of losing Php 400,000, a 30% chance of making profit of Php 550,000, and a 32% chance of getting a break even. Based on these information, should RJ invest his money in the fast food restaurant?

Answer 1

By calculating the expected value of the investment in the fast food restaurant, which turns out to be Php 13,000, it suggests that it could be a favorable investment for RJ since the expected value is positive.

Step-by-step explanation:

To determine whether RJ should invest his money in the fast food restaurant, we can calculate the expected value of the investment. The expected value is a financial concept used to anticipate the potential outcomes of an investment decision, factoring in the probabilities of different results and their corresponding values.

The expected value (EV) can be calculated using the following formula:

EV = (Probability of Outcome 1 × Value of Outcome 1) + (Probability of Outcome 2 × Value of Outcome 2) + ... + (Probability of Outcome n × Value of Outcome n)

Applying this to RJ’s scenario:

• Loss: 0.38 × (-Php 400,000) = -Php 152,000
• Profit: 0.30 × Php 550,000 = Php 165,000
• Break Even: 0.32 × Php 0 = Php 0

The EV for RJ's investment would be:

EV = (-Php 152,000) + Php 165,000 + Php 0

EV = Php 13,000

Since the expected value is positive, it suggests that the investment has a favorable average outcome and RJ could consider investing in the fast food restaurant.