ACCA Applied Skills · Performance Management · Dealing with risk and uncertainty in decision-making
Delta Ltd is considering a project with three possible outcomes: a profit of $80,000 with probability 0.3, a profit of $30,000 with probability 0.5, and a loss of $50,000 with probability 0.2. What is the expected value of the project's profit?
The expected value is $29,000. Each outcome is multiplied by its probability and the results are summed: 24,000 plus 15,000 less 10,000. The loss must be included as a negative figure, weighted by its 0.2 probability.
- A$29,000Correct
- B$30,000
- C$20,000
- D$38,000
Explanation
EV = (80,000 x 0.3) + (30,000 x 0.5) + (-50,000 x 0.2) = 24,000 + 15,000 - 10,000 = $29,000. Check: 0.3+0.5+0.2 = 1. The $38,000 option ignores the loss probability weighting by treating the loss as zero (24,000+15,000 = 39,000 is close; $38,000 is not derived correctly) and $20,000 is wrong.
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