Pederson Home Heating Inc. anticipates that cash flows from home heating fuel sales next year will be $800,000 if the winter is mild, $1,000,000 if winter is average, and $1,500,000 if winter is exceptionally cold. The probability of an average winter is 60%, while the probability of either a mild or an exceptionally cold winter is 20%. What is Pederson's expected cash flow from fuel sales next winter?
A) $1,060,000
B) $1,100,000
C) $1,000,000
D) $1,150,000

Question

Quizplus · Accepted Answer

The expected cash flow is calculated by multiplying each cash flow by its probability and summing the results: (0.2 * $800,000) + (0.6 * $1,000,000) + (0.2 * $1,500,000) = $160,000 + $600,000 + $300,000 = $1,060,000.