IBM Inc.has a project that costs $90,000.It has a 50% chance of paying off $200,000 and a 50% chance of paying off $0.What is the expected payoff and the expected profit or loss from the new project?

Question

Quizplus · Accepted Answer

The expected payoff is calculated as the probability-weighted average of the possible payoffs.

Expected Payoff = (0.5 x $200,000) + (0.5 x $0) = $100,000

The expected profit or loss is calculated as the difference between the expected payoff and the cost of the project.

Expected Profit = Expected Payoff - Project Cost = $100,000 - $90,000 = $10,000

Therefore, the best choice is A, as it correctly identifies the expected payoff and expected profit.

IBM IncHas a Project That Costs $90,000