Which of the following statements is likely to be correct for a decision tree that indicates a 30% chance of making a $250,000 profit and a 70% 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 30% chance of making a profit of $250,000 and a 70% chance of incurring a loss of $140,000. To calculate the expected value, we multiply each possible outcome by its probability and sum the results. In this case, the expected value is (0.3 * $250,000) + (0.7 * -$140,000) = -$14,000 before discounting. Therefore, the correct choice is D, and the expected value is negative before discounting. This means that the decision to proceed with the investment is not recommended based on the information provided.

Which of the Following Statements Is Likely to Be Correct