Aaaction Graphics, Inc. has a project that costs $400,000. It has a 30% chance of paying off $1,000,000 and a 70% chance of paying off $200,000. What is the expected payoff and the expected profit or loss from the new project?
A) The expected payoff is $600,000, and the expected gain is $200,000.
B) The expected payoff is $440,000, and the expected loss is $40,000.
C) The expected payoff is $440,000, and the expected gain is $40,000.
D) The expected payoff is $600,000, and the expected loss is $200,000.

Question

Quizplus · Accepted Answer

The expected payoff is the sum of the products of the probabilities and the payoffs. The expected payoff is (0.3 * $1,000,000) + (0.7 * $200,000) = $440,000. The expected profit or loss is the difference between the expected payoff and the cost of the project. The expected profit or loss is $440,000 - $400,000 = $40,000.