Simplistic Inc. has a project that costs $600,000. It has a 70% chance of a $1,000,000 payoff and a 30% chance of a $100,000 payoff. What is the expected payoff and the expected profit or loss from the new project?
A) The expected payoff is $730,000, and the expected gain is $130,000.
B) The expected payoff is $700,000, and the expected loss is $100,000.
C) The expected payoff is $600,000, and the expected gain is $0.
D) The expected payoff is $500,000, and the expected loss is $100,000.
Answer: A
Explanation: A) Expected Payoff = (.70) × $1,000,000 + (.30) × $100,000 = $730,000.
Expected Profit = $730,000 - $600,000 = $130,000.
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