A construction company plans to invest in a building project. There is a 30% chance that the company will lose $30,000, a 40% chance of a break even, and a 30% chance of a $60,000 profit. Based on this information, what should the company do?
A) The expected value is $9,000.00, so the company should proceed with the project.
B) The expected value is $18,000.00, so the company should proceed with the project.
C) The expected value is -$9,000.00, so the company should not proceed with the project.
D) The expected value is -$18,000.00, so the company should not proceed with the project.

Question

A construction company plans to invest in a building project. There is a 30% chance that the company will lose $30,000, a 40% chance of a break even, and a 30% chance of a $60,000 profit. Based on this information, what should the company do?
A)	The expected value is $9,000.00, so the company should proceed with the project.	
B)	The expected value is $18,000.00, so the company should proceed with the project.	
C)	The expected value is -$9,000.00, so the company should not proceed with the project.	
D)	The expected value is -$18,000.00, so the company should not proceed with the project.

sunnnystrong · Answer

In this problem:
 You are calculating the Expected Monetary Value of a project...
EMV=Probability*Impact
So:
$$EMV=\frac{ 30 }{ 100 }(-$30,000)+\frac{ 40 }{ 100 }($0.00)+\frac{ 30 }{ 60 }($60,000)$$
EMV= $9,000