Question

Consider the following three cases: Case 1 A company has four legal claims outstanding, each for $114,000. There is a 10% chance that one claim will be paid out, a 10% chance that two will be paid out, a 5% chance for three, and a 5% chance for four payouts. Case 2 A company has four legal claims outstanding, each for $114,000. There is a 10% chance that one claim will be paid out, a 60 % chance that two will be paid out, a 5% chance for three, and a 15% chance for four payouts. Case 3 A company has four legal claims outstanding, each for $114,000. There is a 30% chance that one claim will be paid out, a 20% chance that two will be paid out, a 20% chance for three, and a 20% chance for four payouts. Required: 1. For each case, decide if some payout is likely or not likely and calculate the expected value. Case Likely or Not Likely? Expected Value

Answer 1

Ans. Case I. (10% x $114,000) + (10% x $114,000 x 2) + (5% x $114,000 x 3) + (5% x $114,000 x 4) = $74,100

Case 2. (10% x $114,000) + (60% x $114,000 x 2) + (5% x $114,000 x 3) + (15% x $114,000 x 4) = $233,700

Case 3. (30% x $114,000) + (20% x $114,000 x 2) + (20% x $114,000 x 3) + (20% x $114,000 x 4) = $239,400

Case	Likely or Not	Expected Vale
Case. 1	Not	$74,100
Case. 2	Likely	$233,700
Case. 3	Likely	$239,400