The Herald Tribune Inc. has a project that costs $400,000. It has a 30% chance of a $1,000,000 payoff and a 70% chance of a $200,000 payoff. What is the expected payoff and the expected profit or loss from the new project?
A) The expected payoff is $1,000,000, and the expected loss is $200,000.
B) The expected payoff is $440,000, and the expected profit is $10,000.
C) The expected payoff is $400,000, and the expected loss is $40,000.
D) The expected payoff is $440,000, and the expected profit is $40,000.
Answer: D
Explanation: D) Expected Payoff = (.30) × $1,000,000 + (.70) × $200,000 = $440.000.
Expected Profit = $440,000 - $400,000 = $40,000.
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