Question

Set up the following problems as expected value tables and answer the questions.

Your company plans to invest in a particular project. There is a 30% chance that you will lose $30,000, a 45% chance that you will break even, and a 25% chance that you will make $55,000. Based solely on this information, what should you do?

Answer 1

EXPECTED VALUE TABLE

Event         Value to you (Random Variable X)       Probability (P) of X                  XP

1                - 30,000                                              0.30                                   - 9,000

2                 0                                                        0.45                                     0

3               55,000                                                   0.25                                13,750

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Total                                                                                                               4,750

Since the Expected value = $4,750 is positive, you should invest in the project.