Question

A manager is attempting to assess the probability of a recession ending in the next six months and its impact on expected profitability. The manager believes there is a 75 percent chance the recession will end in six months and profits will return to $400 million. However, there is a 25 percent chance the recession will not end in six months, resulting in a $5 million loss. The expected profits over the next six months are:

Answer 1

Expected profit = $298.75 million

Step-by-step explanation:

To calculate the expected return or expected profits, we will simply multiply the probability of each event by the return expected in that event and take a sum the answers. Thus, the expected profit can be calculated as follows,

Expected profit = Probability of recession ending * Profit if recession ends + Probability of recession not ending * profit or loss if recession does not end

Expected profit = 0.75 * 400 + 0.25 * -5

Expected profit = $298.75 million