A family business is considering making an investment in its manufacturing operation.Three decisions are under consideration: (1)a large investment; (2)a medium investment;and (3)a small investment.The business believes that there are three possible future outcomes for its product: (1)increasing demand; (2)stable demand;and (3)decreasing demand.The business believes that the probability for increasing,stable and decreasing product demand are 0.4,0.5,and 0.1,respectively.The following payoff table describes the decision situation.

The expected value for the large investment decision is
A)$700,000
B)$540,000
C)$330,000
D)$165,000

Question

A family business is considering making an investment in its manufacturing operation.Three decisions are under consideration: (1) a large investment; (2) a medium investment;and (3) a small investment.The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand;and (3) decreasing demand.The business believes that the probability for increasing,stable and decreasing product demand are 0.4,0.5,and 0.1,respectively.The following payoff table describes the decision situation.

The expected value for the large investment decision is

The expected value for the large investment decision is
A)$700,000 
B)$540,000 
C)$330,000 
D)$165,000

Quizplus · Accepted Answer

To find the expected value for the large investment decision, we need to calculate the sum of the payoffs for each possible future outcome, weighted by their probabilities:

Expected value for large investment = (0.4 x 800,000) + (0.5 x 500,000) + (0.1 x 0) = 320,000 + 250,000 + 0 = 570,000

The expected value for the medium investment decision is:
Expected value for medium investment = (0.4 x 500,000) + (0.5 x 300,000) + (0.1 x 0) = 200,000 + 150,000 + 0 = 350,000

The expected value for the small investment decision is:
Expected value for small investment = (0.4 x 200,000) + (0.5 x 100,000) + (0.1 x 50,000) = 80,000 + 50,000 + 5,000 = 135,000

Therefore, the best choice is the medium investment decision, as it has the highest expected value of $350,000 compared to the large investment decision with an expected value of $570,000 and the small investment decision with an expected value of $135,000.

A Family Business Is Considering Making an Investment in Its