Question

Under normal conditions (70% probability), Plan A will produce a $20,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the expected value of return?

Answer 1

Answer:

The Expected value of return is -$16,000 or ($16,000)

Explanation:

Expected value is the estimated / predicted value which is the sum of all available option multiplied by the probability of occurrence. It the Weighted average value of all the outcome on the basis of their probabilities.

Expected value = ( Return amount option 1 x probability 1 ) + ( Return amount option 2 x probability 2 )

Expected value = ( $20,000 x 70% ) + ( -100,000 x 30% )

Expected value = $14,000 - $30,000

Expected value = ($16,000)