Which of the following statements is likely to be correct for a decision tree which indicates a 30 percent chance of making a $250,000 profit and a 70 percent chance of sustaining a $140,000 loss?
A)The decision should be "yes" whenever the amount of possible profit exceeds the amount of possible loss
B)The decision should be "no" whenever there is a possibility of loss
C)The expected value is positive before discounting
D)The expected value is negative before discounting

Question

Quizplus · Accepted Answer

The decision tree indicates a 0.3 probability of a profit of $250,000 and a 0.7 probability of a loss of $140,000. The expected value can be calculated as (0.3 x $250,000) + (0.7 x -$140,000) = -$35,000. This means that the expected value is negative before discounting, so it would not be a good decision to proceed with this option. Therefore, the best choice is D.

Which of the Following Statements Is Likely to Be Correct