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A project will cost $11.5 million. The forecasted revenue arising for two possible economic conditions are shown in the table below
Economic condition
Probability (p)
Revenue (r) $ million
(px r) $ million
Adverse. 0.3 8 2.4
Favourable 0.7 15 10.5Expected value
12.9
Which TWO of the following statements are CORRECT?
1. The forecast suggests that the project will make a profit of $1.4 million
2. The forecast suggests that the project could make a loss of $9.1 million3. If the two economic outcomes were forecast as being equally likely, the expected revenue would match the cost
4. The forecast suggests that the project could make a loss of $3.5 million
I am confused should i take only revenue figures when calculating the loss then it becomes 11.5-8=3.5 or should i include probability aswell then 11.5-2.4= 9.1
Also how can revenue match the cost
Is my answer 3 and 4 statements correct?1 is wrong – they will either make a profit of 15 – 11.5 = 3.5, or they will make a loss of 8 – 11.5 = 3.5.
2 is wrong – see (1)
3 is correct – see (1) where they could make a loss of 3.5.
4 is correct – if the outcomes were equally likely, then the expected revenue would be (0.5 x 8) + (0.5 x 15) = 11.5, which is the same as the cost.
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