John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.The difference in expected earnings if John chooses to expand versus not expand is:
A) $320,000.
B) $200,000.
C) $150,000.
D) $120,000.

Question

Quizplus · Accepted Answer

The expected earnings without expansion are $200,000. With expansion, the expected earnings are $320,000. Subtracting the expansion cost of $150,000 gives a net expected earnings of $170,000. The difference in expected earnings is $320,000 - $200,000 = $120,000.

John Is Trying to Decide Whether to Expand His Business