Company X has assessed a 60%/40% probability of success if it introduces a new soap on the market

Business Sep 10, 2020

Company X has assessed a 60%/40% probability of success if it introduces a new soap on the market. If the soap is successful, the company will make a net profit of $225,000. If the soap does not sell, the company will lose $65,000. What is the expected value of this decision?

Expert Solution

In probability theory the expected value of a random variable is the sum of the probability of each possible outcome of the experiment multiplied by its payoff ("value"). Thus, it represents the average amount one "expects" as the outcome of the random trial when identical odds are repeated many times.

In this case, the expected value of the profit resulting from this decision is:
0.6*$225,000 - 0.4*$65,000 = $109,000.

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