Nikolai Taranenko and his shady partner, Julianne Nee, purchased a foreclosed pr

Question

Nikolai Taranenko and his shady partner, Julianne Nee, purchased a foreclosed property for $50,000 and spent an additional $27,000 on repairs. They feel that they have a 15% probability of reselling the property for $120,000, a 45% probability of reselling it for $100,000, a 25% probability of reselling it for $80,000, and a 15% probability of selling it for $60,000. What is their expected profit/loss for reselling the property? (First calculate the expected sale price and, after that, what the profit/loss would be.) And, can we trust them?

Explanation / Answer

Expected Sale price = 0.15 *(120,000) + 0.45*(100,000) + 0.25*(80,000) + 0.15*(60,000)

= $ 92,000

Expected profit = Expected Sale - Purchase price - Cost of repairs = 92,000 - 50,000 - 27,000

= $15,000

This is the expected profit, but reality might be different from expectations.

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