You have a project that costs $800,000.It has a 1/3 chance of paying off $3,000,000 and a 2/3 chance of paying off $0.What is the expected profit from the new project?
A)$300,000
B)$200,000
C)$100,000
D)zero

Question

Quizplus · Accepted Answer

Expected profit = (Probability of high payoff * High payoff amount) + (Probability of low payoff * Low payoff amount)
Expected profit = (1/3 * $3,000,000) + (2/3 * $0)
Expected profit = $1,000,000 - $0
Expected profit = $1,000,000

However, the project costs $800,000 so the expected profit is reduced by this amount.
Expected profit = $1,000,000 - $800,000
Expected profit = $200,000

Therefore, the best choice is B.

You Have a Project That Costs $800,000