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.John decides to expand. Which of the following is true?
A)John's expected revenue is $50,000 less than it would have been if he didn't expand.
B)John will earn $120,000 more revenue, but this amount is less than the cost of expansion.
C)John will earn $120,000 more revenue and therefore made the most profitable decision.
D)All of these statements are true.

Question

Quizplus · Accepted Answer

The expected revenue without expansion is $200,000. With expansion, the expected revenue is $320,000, but after subtracting the $150,000 cost, the net revenue is $170,000, which is $30,000 less than without expansion. However, the revenue increase is $120,000, but it doesn't cover the expansion cost.

John Is Trying to Decide Whether to Expand His Business