Top Cat Ventures, Inc., explores for natural gas. The company is considering a particular drilling site with a geological structure that has a 65% probability of yielding enough natural gas to produce revenue of $2 million. The probability is 35% that the site will yield zero revenue and result in a loss of $500,000. What is the expected value of drilling at this site?
A) $1.125 million
B) $1.6 million
C) A $500,000 loss
D) $1.5 million

Question

Quizplus · Accepted Answer

The expected value (EV) is calculated by multiplying each outcome by its probability and summing these products. EV = (0.65 * $2,000,000) + (0.35 * -$500,000) = $1,300,000 - $175,000 = $1,125,000.