Question

an investor is considering investing $10,000 in a startup company. if the company suceeds, the investment will be worth $100,000, and if the company fails, it will be worth nothing. The probablity of the company succeeding is 15%.

a) what would be tje expected value of the investment?

b) based on the proceeding, would this be a good investment?

Answer 1

Given that if the company suceeds, the investment will be worth $100,000 and the probability of succeeding is 15%

But the investor will invest $10000

So the investor will be gaining = $100000 - $10000

= $90000

If the company fails, the investment will be worth nothing

So the investor will lose = $0 - $10000

= -$10000

The probability of failing = 1 - 0.15

= 0.85

= 15%

Question (a)

Expected value of the investment for the investor = 0.15 * $90,000 + 0.85 * (-$10000)

= $13500 - $8500

= $5000

Question (b)

Since the expected value of the investment is positive, the investment would be a good investment