Simplistic Inc.has a project that costs $600,000.It has a 70% chance of a $1,000,000 payoff and a 30% chance of a $100,000 payoff.What is the expected payoff and the expected profit or loss from the new project?
A)The expected payoff is $730,000,and the expected gain is $130,000.
B)The expected payoff is $700,000,and the expected loss is $100,000.
C)The expected payoff is $600,000,and the expected gain is $0.
D)The expected payoff is $500,000,and the expected loss is $100,000.

Question

Quizplus · Accepted Answer

The expected payoff is calculated as follows:
Expected payoff = (Probability of high payoff x High payoff) + (Probability of low payoff x Low payoff)
Expected payoff = (0.7 x $1,000,000) + (0.3 x $100,000) = $730,000

The expected profit or loss is calculated by subtracting the project cost from the expected payoff:
Expected profit or loss = Expected payoff - Project cost
Expected profit or loss = $730,000 - $600,000 = $130,000

Therefore, the best choice is A, as it provides the highest expected payoff and a positive expected profit.