Keystone Brewing,Inc.has a project that costs $1,000,000.It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0.What is the expected payoff and the expected profit or loss from the new project?
A)The expected payoff is $1,000,000,and the expected loss is $10,000.
B)The expected payoff is $100,000,and the expected profit is $10,000.
C)The expected payoff is $100,000,and the expected loss is $100,000.
D)The expected payoff is $1,000,000,and the expected profit is $0.

Question

Quizplus · Accepted Answer

The expected payoff is calculated as the sum of the possible outcomes weighted by their probabilities:

Expected payoff = (0.5 x $2,000,000) + (0.5 x $0) = $1,000,000

The expected profit or loss is calculated as the difference between the expected payoff and the project cost:

Expected profit/loss = $1,000,000 - $1,000,000 = $0

Therefore, the best choice is D, as it represents the expected outcome of the project.