Keystone Generation, Inc. has a project that costs $900,000. It has a 50% chance of paying off $2,000,000 and a 50% chance of paying off $0. 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 $10,000.
B) The expected payoff is $100,000, and the expected profit is $10,000.
C) The expected payoff is $100,000, and the expected loss is $100,000.
D) The expected payoff is $1,000,000, and the expected profit is $100,000.
Answer: D
Explanation: D) Expected Payoff = (1/2) × $2,000,000 + (1/2) × $0 = $1,000,000.
Expected Profit = $1,000,000 - $900,000 = $100,000.
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