A coffee franchise is opening a new store. The company estimates that there is a 75% chance the store will have a profit of $45,000, a 10% chance the store will break even, and a 15% chance the store will lose $2,500. Determine the expected gain or loss for this store.
Calculate the expected value E(x). Expected value is the sum of each event probability times the payoff or loss:
E(x) = 0.75(45,000) + 0.1(0) + 0.15(-2,500) <-- Note, break even means no profit and no loss and a loss is denoted with a negative sign
E(x) = 33,750 + 0 - 375
E(x) = 33,375 gain
Calculate the expected value E(x). Expected value is the sum of each event probability times the payoff or loss:
E(x) = 0.75(45,000) + 0.1(0) + 0.15(-2,500) <-- Note, break even means no profit and no loss and a loss is denoted with a negative sign
E(x) = 33,750 + 0 - 375
E(x) = 33,375 gain