Simplistic Inc.has a project that costs $800,000.It has a 70% chance of a $1,500,000 payoff and a 30% chance of a $50,000 payoff.What is the expected payoff and the expected profit or loss from the new project?
A)The expected payoff is $1,065,000,and the expected gain is $265,000.
B)The expected payoff is $700,000,and the expected loss is $100,000.
C)The expected payoff is $600,000,and the expected gain is $0.
D)The expected payoff is $500,000,and the expected loss is $100,000.

Question

Quizplus · Accepted Answer

To find the expected payoff, we multiply the probability of each outcome by its corresponding payoff, then add the results:
Expected payoff = (0.7 x $1,500,000) + (0.3 x $50,000) = $1,065,000

To find the expected profit or loss, we need to subtract the cost of the project from the expected payoff:
Expected profit = Expected payoff - Cost of project = $1,065,000 - $800,000= $265,000

Therefore, the best choice is A, because it gives the correct expected payoff and expected profit.