A new business opportunity has a 70% chance of being worth $500,000 next year and a 30% chance of being worth $100,000. The appropriate expected rate of return is 10%.
-Refer to the information above. What is the expected value of this investment?
A)$380,000
B)$300,000
C)$220,000
D)none of the above

Question

Quizplus · Accepted Answer

We can calculate the expected value by multiplying the probability of each outcome by its corresponding value and summing them together.

Expected value = (0.7 x $500,000) + (0.3 x $100,000) 
Expected value = $350,000 + $30,000 
Expected value = $380,000

Therefore, the expected value of this investment is $380,000. Option A is the best choice as it gives the correct expected value. Expected value = (0.7 x $500,000) + (0.3 x $100,000) = $350,000 + $30,000 = $380,000. Since the expected value is greater than the initial investment amount, investing in this opportunity is a good choice.

A New Business Opportunity Has a 70% Chance of Being