King, Inc., a successful Midwest firm, is considering opening a branch office on

Question

King, Inc., a successful Midwest firm, is considering opening a branch office on the west coast. Under normal economic conditions, with a 45% probability of occurring, King can expect to earn a net income of $70,000 per year. In a mini-recession, at 25% probability, King will earn $20,000. In a severe recession, at a 20% probability, King will lose $15,000. There is also a slight probability (10%) that King will lose $300,000 if the expansion fails and the branch office must be closed. Should King open a branch office in California based on these assumptions?

Explanation / Answer

Total Expected Earning= 70000*45%+20000*25% = 31500+5000= $ 36500

Total Expected Loss= 15000*20%+300000*10%=3000+30000=33000

Net Expected Earnings=36500-33000= $ $ 3500

As the total expected earning is positive King Inc. can open a branch office in california

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