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 expected value for this decision tree can be calculated as: 
E(V) = (0.3 x $250,000) + (0.7 x -$140,000) = $75,000 - $98,000 = -$23,000
Since the expected value is negative, the decision should not be taken, even if there is a possibility of making a profit. Therefore, option D is the correct answer.

Which of the Following Statements Is Likely to Be Correct