A construction company plans to invest in a building project. There is a 30% chance that the company will lose $30,000, a 40% chance of a break even, and a 30% chance of a $60,000 profit. Based ONLY on this information, what should the company do?

Answer 1

Based on the information provided, the expected value of the investment can be calculated by multiplying the probability of each outcome by the respective profit or loss amount:

Expected Value = (0.30 * -$30,000) + (0.40 * $0) + (0.30 * $60,000)
Expected Value = -$9,000 + $0 + $18,000
Expected Value = $9,000

The expected value of the investment is $9,000, meaning that on average, the company can expect to make a profit of $9,000 from this project.

Therefore, based on this information, the company should go ahead with the building project since the expected value is positive, indicating that it is a profitable investment on average.