Question

Your business is looking into three contracting firms. Based on previous research, there is a 75% chance that company 1 will earn you $40,000. There is a 45% chance that company 2 will earn you $60,000. Company 3 has a 30%chance of earning you $80,000. It costs $20,000 to draw up legal paperwork for each company. How much profit or loss would you expect after this deal is done if you sign with all 3 companies?
$21,000 loss
$81,000 loss
$21,000 profit
$81,000 profit​

Answer 1

there would be a $21,000 profit.

this is because of the equation:$40,000(.75) + 60,000(.45)+80,000(.30)+(-20,000)(1)= 21,000$

Answer 2

I would expect a $21,000 profit if I sign with all 3 companies.

Given that my business is looking into three contracting firms, and based on previous research, there is a 75% chance that company 1 will earn me $ 40,000, there is a 45% chance that company 2 will earn me $ 60,000, while Company 3 has a 30% chance of earning me $ 80,000, and it costs $ 20,000 to draw up legal paperwork for each company, to determine how much profit or loss would I expect after this deal is done if I sign with all 3 companies, the following calculation must be performed:

• ((40,000 x 0.75) - 20,000) + ((60,000 x 0.45) - 20,000) + ((80,000 x 0.30) - 20,000) = X
• 30,000 - 20,000 + 27,000 - 20,000 + 24,000 - 20,000 = X
• 81,000 - 60,000 = X
• 21,000 = X

Therefore, I would expect a $21,000 profit if I sign with all 3 companies.

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