John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.What is the difference in expected earnings if John chooses to expand versus not expand?
A)$320,000
B)$200,000
C)$150,000
D)$120,000

Question

Quizplus · Accepted Answer

The expected earnings without expansion = (0.5 * $100,000) + (0.5 * $300,000) = $50,000 + $150,000 = $200,000. The expected earnings with expansion = (0.3 * $100,000) + (0.3 * $300,000) + (0.4 * $500,000) - $150,000 (cost of expansion) = $30,000 + $90,000 + $200,000 - $150,000 = $170,000. The difference = $200,000 - $170,000 = $30,000, which is not among the options provided, indicating a need for reevaluation of the calculation. Correct calculation: Expected earnings without expansion = $200,000 (as calculated). Expected earnings with expansion (before subtracting cost) = $30,000 + $90,000 + $200,000 = $320,000. After subtracting the cost of expansion, the expected earnings = $320,000 - $150,000 = $170,000. Thus, the difference in expected earnings if John chooses to expand versus not expand is incorrectly stated in the initial explanation. The correct approach to find the difference in expected earnings: Expected earnings without expansion = $200,000. Expected earnings with expansion (correct calculation) = (0.3 * $100,000) + (0.3 * $300,000) + (0.4 * $500,000) = $30,000 + $90,000 + $200,000 = $320,000. Subtracting the cost of expansion from the total expected revenue with expansion gives us the net expected earnings with expansion: $320,000 - $150,000 = $170,000. Therefore, the correct calculation for the difference in expected earnings if John chooses to expand versus not expand should consider the net expected earnings with expansion and compare it to the expected earnings without expansion. The initial response failed to accurately calculate or compare these values based on the provided choices.

John Is Trying to Decide Whether to Expand His Business