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John is trying to decide whether to expand his business or not.
If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000.
If he does expand, there is a 30 percent chance his revenue will be $100,000, a 30 percent chance his revenue will be $300,000 and a 40 percent chance his revenue will be $500,000. It will cost him $150,000 to expand. If John were to expand, which of the following is true?
A. John's expected revenue is $50,000 less than if he didn't expand.
B. John can expect to earn $120,000 in revenue more by expanding, but that is less than the cost of expansion, $150,000.
C. John can expect to earn $120,000 in revenue more by expanding and therefore made the most profitable decision.
D. All of these statements are true.

Respuesta :

jepessoa

Answer:

B) John can expect to earn $120,000 in revenue more by expanding, but that is less than the cost of expansion, $150,000.

Explanation:

If John decides not to expand his expected revenue will be = ($100,000 x 50%) + ($300,000 x 50%) = $50,000 + $150,000 = $200,000

If John decides to expand his expected revenue will be = ($100,000 x 30%) + ($300,000 x 30%) + ($500,000 x 40%) = $30,000 + $90,000 + $200,000 = $320,000

If John decides to expand, his revenue will increase by $120,000.

Since we are not told if John's revenue is yearly or not, I assume that it includes a whole business or project cycle. The cost of expanding is $150,000 while the incremental revenue is only $120,000.

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