ACCA MA · Chapter 2 · Question 10 of 12
A project has the following possible outcomes: Profit $50,000 with probability 0.3 Profit $20,000 with probability 0.5 Loss $10,000 with probability 0.2 What is the expected value of the project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $23,000 profit
Explanation
EV = sum of (outcome x probability) = (50,000 x 0.3) + (20,000 x 0.5) + (-10,000 x 0.2) = 15,000 + 10,000 - 2,000 = $23,000. Treating the loss as a profit gives $27,000, and leaving it out gives $25,000.
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