Your company plans to invest a particular project. There is a 5% chance that you will lose $30, 000, a 40% chance that you will break even, and a 25% chance that you will make $55, 000. Based solely on this information, what should you do?
expected value of investment:
.05*(-30,000)+.40*0+.25*55,000=
12,250
so the investment has a postitive outcome as of now. Notice all outcomes are not listed, only listed are 70 percent of the outcomes. Frankly, I would like more information.
To determine what you should do based solely on the information provided, we need to calculate the expected value of the investment.
Expected value is calculated by multiplying the possible outcomes by their respective probabilities and summing them up.
Let's calculate the expected value:
Expected value = (0.05 * (-$30,000)) + (0.40 * $0) + (0.25 * $55,000)
Expected value = (-$1,500) + ($0) + ($13,750)
Expected value = $12,250
The expected value of the investment is $12,250.
Since the expected value is positive, it indicates a positive return on investment. Therefore, based on this information, you should proceed with the project as the expected outcome is favorable.
To determine what you should do based on the given probabilities, you need to calculate the expected value of the investment.
The expected value is calculated by multiplying the potential outcomes by their respective probabilities and summing them up.
Let's break down the calculation:
1. The probability of losing $30,000 is 5%, which means the loss is (-$30,000 * 0.05) = -$1,500.
2. The probability of breaking even is 40%, so the outcome is $0 in this case.
3. The probability of making $55,000 is 25%, so the gain would be ($55,000 * 0.25) = $13,750.
Now, let's calculate the expected value by summing up these outcomes:
Expected value = (-$1,500 + $0 + $13,750) = $12,250
Based on this information, the expected value of the investment is $12,250. Since it is a positive expected value, it suggests that the investment is likely to be profitable. However, it is also essential to consider other factors such as risks, costs, and potential returns compared to alternative investments.