SOLUTION: 4. Claire is considering investing in a new business. In the first year, there is a probability of 0.2 that the new business will lose $10,000, a probability of 0.4 that the new bu

Question 1206460: 4. Claire is considering investing in a new business. In the first year, there is a probability of 0.2 that the new business will lose $10,000, a probability of 0.4 that the new business will break even ($0 loss or gain), a probability of 0.3 that the new business will make $5,000 in profits, and a probability of 0.1 that the new business will make $8,000 in profits.
a. Claire should invest in the company if she makes a profit. Should she invest? Explain using expected values.
b. If Claire’s initial investment is $1,200 and the expected value for the new business stays constant, how many years will it take for her to earn back her initial investment?
Answer by ikleyn(52776) (Show Source): You can put this solution on YOUR website!
.


(a)  Question (a) is sensical, and the answer to it is

         E = 0.2*10000 + 0.4*0 - 0.3*5000 - 0.1*8000 = -300 dollars.


     In wording form, it means that this business will produce 300 dollars loss
     in the first year, in average, if repeat this experiment many times.



(b)  Question (b) is non-sensical, from any point of view, 
     so I will not even try to answer it.


     I only may advise do not compose and do not ask non-sensical questions in the future.

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