Facing the worst economic climate since the dotcombust in the early 2000\'s, hig
ID: 3154510 • Letter: F
Question
Facing the worst economic climate since the dotcombust in the early 2000's, high tech companies in the united states search for investment oppertunitities with cautious optimism (USA TODAY feb. 17, 2009). Suppose the investment team at Microsoft is considering and innovative start a project. According to its estimates, Microsoft can make a profit of 5 million if the project is very successful and 2 million if it is somewhat successful. It can also stand to lose 4 million if the project fails. Calculate the expected profit or loss for Microsoft if the probabilities that the project is a very successful is .10 and .40, respectively, with the remaining amount being the failure probability.
Explanation / Answer
Expected payout, E(X)=summation Xi * P(Xi)=5*0.10+2*0.40-4*0.5=-0.7 million
Therefore, expected loss for Microsoft is 0.7 million.
Payout Probability 5 million 0.10 2 million 0.40 -4 million 0.5Related Questions
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