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dear sir/madam,
i am struggling to solve this question,your help will be highly appreciated.There is is 60% chance that project A will make a profit of $100 000 and a 40% chance of making $40 000 profit.Project B will either make a profit of $220 000 or a loss of $20 000
The decision maker uses the expected value criterion.
The probability of project B making a profit of $220 000 that would make the decision maker indifferent between the two projects is (3 decimal place)?The expected value for A is (0.6 x 100000) + (0.4 x 40000) = 76,000.
For B, if the probability of making a profit is X, then the expected value of B is:
(X x 220000) – ((1-X) x 20000)So 220,000X – 20,000 + 20,000X = 76,000
You should be able to finish it off now 🙂
(the answer is 0.4)
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