3. American Airlines plans to offer several new electronic services on ignts bet

Question

3. American Airlines plans to offer several new electronic services on ignts between Tokyo and selected European destinations. The marketing director estimates that for a typical twenty-four hour period there is a 50% chance of having a net cash flow of $5,000 and a 35% chance of a net cash flow of $10,000. She also estimates that there is a small 5% chance of no cash flow and a 10% chance of a loss of $1,000, which is the estimated extra personnel and utility costs to offer the services. Compute the expected net cash flow.

Explanation / Answer

Expected net cash flow = p.x

Expected net cash flow = (0.5*5000) + 0.35(10,000) + 0.05(0) + 0.1(-1000)

Expected net cash flow = 2500 + 3500 + 0 - 100

Expected net cash flow = $5900

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