Modigliani and Associates has forecasted the following payoffs from a project: $$\begin{array} { r c l }
\text { Outcome } & \text { Probability of Outcome } & \text { Assumptions } \
\$ 0 & 20 \% & \text { pessimistic } \
\$ 3,500 & 60 \% & \text { moderately successful } \
\$ 6,000 & 20 \% & \text { optimistic }
\end{array}$$ What is the expected value of the outcomes?

Question

Modigliani and Associates has forecasted the following payoffs from a project: $$\begin{array} { r c l } 
\text { Outcome } & \text { Probability of Outcome } & \text { Assumptions } \
\$ 0 & 20 \% & \text { pessimistic } \
\$ 3,500 & 60 \% & \text { moderately successful } \
\$ 6,000 & 20 \% & \text { optimistic }
\end{array}$$ What is the expected value of the outcomes?

Quizplus · Accepted Answer

To find the expected value of the outcomes, we multiply each payoff by its probability and then add them up. 
Expected value = (0.2 x 0) + (0.6 x 3500) + (0.2 x 6000) = 2100 + 1200 = 3300. Therefore, the best choice is B.

Modigliani and Associates Has Forecasted the Following Payoffs from a Project