A retailer is considering building a large store.If the local economy experiences expansion,the firm expects the store to earn a $2,000,000 profit next year.If the local economy experiences a contraction,the firm expects the store to lose $400,000 next year.Analysts estimate a 20% chance for the local economy to experience an expansion next year (hence an 80% chance for contraction).What is the expected monetary value (EMV)of building the large store?
A)$1,600,000
B)$720,000
C)$2,000,000
D)$80,000
E)$1,520,000

Question

Quizplus · Accepted Answer

The EMV is calculated as (0.20 * $2,000,000) + (0.80 * -$400,000) = $400,000 - $320,000 = $80,000.

A Retailer Is Considering Building a Large Store