Question

"An investor is considering a $20,000 investment in a start-up company. She estimates that she has probability 0.25 of a $15,000 loss, probability 0.1 of a $20,000 profit, probability 0.1 of a $25,000 profit, and probability 0.55 of breaking even (a profit of $0). What is the expected value of the profit?"

Answer 1

Answer:

Expected value of profit = -3750 + 2,000 + 2,500 + 0

Explanation:

The expected value of is the sum of the possible profit under different outcomes multiplied by their respective probabilities

Profit                Prob             P× Profit

(15000)       ×     0.25  =      -3750

20,000        ×       0.1    =        2,000

25,000        ×       0.1  =            2,500

    0            ×    0.55   =         0_____

Expected value of  profit =             750

Expected value of profit = -3750 + 2,000 + 2,500 + 0

= $750

Note the figures given are stated as profits and not revenue. So we do not make use of the investment cost of $20,000