A construction company plans to invest in a building project. There is a 30% chance that the company will lose $30,000, a 40% chance of a break even, and a 30% chance of a $60,000 profit. Based ONLY on this information, what should the company do?
Based on the information provided, the expected value of the investment can be calculated by multiplying the probability of each outcome by the respective profit or loss amount:
Expected Value = (0.30 * -$30,000) + (0.40 * $0) + (0.30 * $60,000)
Expected Value = -$9,000 + $0 + $18,000
Expected Value = $9,000
The expected value of the investment is $9,000, meaning that on average, the company can expect to make a profit of $9,000 from this project.
Therefore, based on this information, the company should go ahead with the building project since the expected value is positive, indicating that it is a profitable investment on average.