ExpertMedium2 marksShort Answer
ACCA · Question 07 · Syllabus B: Data analysis and statistical techniques
A cloud hosting provider is launching a new premium server tier. The marketing department has estimated the following probabilities for first-year profits:
- 30% probability of $120,000 profit
- 50% probability of $80,000 profit
- 20% probability of a $20,000 loss (negative profit)
Calculate the Expected Value (EV) of the first-year profit. (Enter number only, no commas or symbols)
A cloud hosting provider is launching a new premium server tier. The marketing department has estimated the following probabilities for first-year profits:
- 30% probability of $120,000 profit
- 50% probability of $80,000 profit
- 20% probability of a $20,000 loss (negative profit)
Calculate the Expected Value (EV) of the first-year profit. (Enter number only, no commas or symbols)
How to approach this question
Multiply each outcome by its probability and sum the results. Remember to treat the loss as a negative number.
Full Answer
Expected Value = Σ(px)
EV = (0.30 × $120,000) + (0.50 × $80,000) + (0.20 × -$20,000)
EV = $36,000 + $40,000 - $4,000 = $72,000.
Common mistakes
Treating the $20,000 loss as a positive number, resulting in $80,000.
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