Graphic Design Inc.has a project that costs $150,000.It has a 50% chance of a $300,000 payoff and a 50% chance of a $100,000 payoff.What is the expected payoff and the expected profit or loss from the new project?
A)The expected payoff is $200,000 and the expected profit is $10,000.
B)The expected payoff is $110,000 and the expected profit is $10,000.
C)The expected payoff is $200,000 and the expected profit is $50,000.
D)The expected payoff is $150,000 and the expected loss is $0.

Question

Quizplus · Accepted Answer

The expected payoff is calculated by multiplying the probability of each payoff outcome by the payoff amount and adding them together. Therefore, the expected payoff for this project is (0.5 * $300,000) + (0.5 * $100,000) = $200,000.

The expected profit or loss is calculated by subtracting the project cost from the expected payoff. Therefore, the expected profit for this project is $200,000 - $150,000 = $50,000.

Thus, the best choice would be to pursue the project since the expected profit is positive.