ExpertMedium2 marksMultiple Choice
ACCA · Question 07 · Statistical Techniques
Section A
Titan Heavy Industries is considering launching a new industrial crane. The project has a 40% probability of generating a profit of $2,000,000, a 35% probability of generating a profit of $500,000, and a 25% probability of resulting in a loss of $800,000. What is the expected value of the project?
Section A
Titan Heavy Industries is considering launching a new industrial crane. The project has a 40% probability of generating a profit of $2,000,000, a 35% probability of generating a profit of $500,000, and a 25% probability of resulting in a loss of $800,000. What is the expected value of the project?
Answer options:
A.
$1,175,000
B.
$775,000
C.
$566,667
D.
$975,000
How to approach this question
Multiply each outcome by its probability and sum the results. Remember that a loss is a negative number.
Full Answer
B.$775,000✓ Correct
Expected Value (EV) = Σ(px). EV = (0.40 * $2,000,000) + (0.35 * $500,000) + (0.25 * -$800,000) = $800,000 + $175,000 - $200,000 = $775,000.
Common mistakes
Adding the loss instead of subtracting it.
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