Question

Under normal conditions (70% probability), Plan A will produce $20,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the expected value of returns?
A. ($16,000)
B. ($2,000)
C. $28,000
D. $58,000

Answer 1

Answer:

A. ($16,000)

Explanation:

The computation of the expected value of return equal to

=  (Higher return × probability rate) - (Less return -  probability rate)

= ($20,000 × 70%) - ($100,000 × 30%)

= $14,000 - $30,000

= - $16,000

For computing the correct value we have to deduct the tighter money conditions from the normal conditions.