Question

12)

Solve the problem.

12) A commercial building contractor is trying to decide which of two

projects to commit her company to.

Project A: a profil of $50,000 with a probability of 0.6, a profit of $90,000

with a probability of 0.3, and a profit of $10,000 with a probability of 0.1.

Project B: a profit of $100,000 with a probability of 0.1, a profit of $64,000

with a probability of 0.7, and a loss of $20,000 with a probability of 0.2.

Find answer lines 1 & 2)the expected profit for each & (answer line 3

which project should be selected.

Answer 1

Project A : $58,000

Project B: $52800

Project A should be selected as it has a higher expected profit value than project B

Explanation:

Given the following:

PROJECT A:

Profit : ---------50000--90,000--10,000

Probability: ----0.6-------0.3--------0.1

PROJECT B:

Loss of 20,000 = -20,000 in profit terms

Profit : -----100,000--64,000--(-20,000)

Probability: ----0.1-------0.7--------0.2

Expected profit:

Profit value * probability of profit

Expected profit on project A:

[(50000*0.6)+(90000*0.3)+(10000*0.1)

30000 + 27000 + 1000 = $58000

Expected profit on project B:

[(100000*0.1)+(64000*0.7)+(-20000*0.2)

10000 + 44800 - 4000 = $50800

Project A should be selected as it has a higher expected profit value than project B