Suppose Regis has a 25 percent chance of not collecting $1,000 in one year.If the interest rate is 10 percent,what is the expected value of the future payment?

Question

Quizplus · Accepted Answer

The expected value of the future payment can be calculated using the formula:

Expected value = (Probability of payment) x (Amount of payment)

Since Regis has a 25 percent chance of not collecting the payment, the probability of payment is 1 - 0.25 = 0.75.

The amount of payment is $1,000 plus the interest earned over one year, which is $1,000 x 0.1 = $100.

Therefore, the expected value of the future payment is:
Expected value = 0.75 x ($1,000 + $100) = $750 + $75 = $825.

However, since we are looking for the expected value of not receiving the payment, we need to subtract this value from the total amount:

Expected value of not receiving payment = $1,000 - $825 = $175.

Therefore, the best choice is B, with an expected value of not receiving payment of $175.

Suppose Regis Has a 25 Percent Chance of Not Collecting