Question

question one

Kroc Inc. a successful Boston-based firm, is considering opening a store in No Under normal economic conditions, with 40% probability of occurring, Kroc can expect to earn net income of $80,000 a vear. In a mini-recession, at 30% probability, Kroc will earn $50,000. In a severe recession, at a 20% probability. Kroc will lose $25,000. There is also a slight 10% probability that Kroc will lose $275.000 if the expansion fails and the Natick store must be closed. Required: Now should Kroc Inc. open the Natick store based on these assumptions

Answer 1

We have to calculate weighted average gain based on the probabilities of various situation.

Situations	Probability	Gain / (Loss)	Weighted Gain
Normal Economic Situation	40%	80,000	32,000
Mini Recession	30%	50,000	15,000
Severe Recession	20%	(25,000)	(5,000)
Failure of Expsnsion	10%	(2,75,000)	(27,500)
Total weighted average Gain			14,500

Since there is net gain based on various probabilities, Kroc Inc should open the natick store.