Modigliani and Associates has forecasted the following payoffs from a project:
$$\begin{array}{l}
\begin{array} { r c l }
&\text { Probability of }\
\text { Outcome } & \text { Outcome } & &\text { Assumption: }\
\$0 & 20 \% & \text { pessirmstic } \
\$3,500 & 60 \% & \text { moderately successful } \
\$6,000 & 20 \% & \text { optimistic }
\end{array}
\end{array}$$
What is the expected value of the outcomes?

Question

Modigliani and Associates has forecasted the following payoffs from a project:
$$\begin{array}{l}
\begin{array} { r c l } 
&\text { Probability of }\
\text { Outcome } & \text { Outcome } & &\text { Assumption: }\
\$0 & 20 \% & \text { pessirmstic } \
\$3,500 & 60 \% & \text { moderately successful } \
\$6,000 & 20 \% & \text { optimistic }
\end{array}
\end{array}$$
What is the expected value of the outcomes?

Quizplus · Accepted Answer

The expected value (EV) is calculated by multiplying each outcome by its probability and then summing those values: EV = (0 * 0.20) + (3500 * 0.60) + (6000 * 0.20) = 0 + 2100 + 1200 = $3,300.

Modigliani and Associates Has Forecasted the Following Payoffs from a Project