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 $54,000 per year. In a mini-recession, at 25% probability, King will earn $22,000. In a severe recession, at a 20% probability, King will lose $17,000. There is also a slight probability (10%) that King will lose $209,000 if the expansion fails and the branch office must be closed.

What is the expected profit of the new branch?

Explanation / Answer

Probability Net Income Discounted income Normal Condition 45%           54,000                            24,300 Mini-recession 25%           22,000                              5,500 Severe recession 20%          -17,000                            -3,400 Slight Probability 10%      -2,09,000                          -20,900 Expected profit of the new branch                              5,500

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.