Question

A company opening a new plant will:

generate net present value of profits of $500,000 with probability 0.4,

generate net present value of profits of $200,000 with probability 0.5,

and

generate net present value of profits of $100,000 with probability 0.1

What are the expected profits from the new plant?

Group of answer choices

$200,000

$100,000

$310,000

$370,000

$10,000

Answer 1

The correct answer is 'Option C'.

The expected profit can be calculated by multiplying the net present value of profit by respective probabilities and adding them together. So,

Expected Profit = (5,00,000)(0.4) + (200,000)(0.5) + (1,00,000)(0.1)

Expected Profit = 200,000 + 100,000 + 10,000

Expected Profit = 3,10,000

So, the correct answer is 'Option C'.