Question

Under good conditions (25% probability), Financing Plan A will produce $30,000 higher return than Plan B. Under normal conditions (65% probability), Plan A will produce $10,000 higher return than Plan B, and under tight money conditions (10% probability), Plan A will produce $100,000 less than Plan B. How much more (less) is the expected value of return for Plan A over Plan B?

A. ($10,000)

B. ($20,000)

C. ($60,000)

D. $4,000

Answer 1

Calculation of expected return for Plan A over Plan B:
Increase/ decrease in return= 0.25*(30000)+0.65*(10000)+0.10*(-100000)
= 7500+6500-10000= $4000
Increase in return is $4000
So correct answer is D) $4000