ExpertEasy2 marksMultiple Choice
ACCA · Question 09 · Data analysis and statistical techniques
A biotech firm is developing a new drug. There is a 40% probability that the drug will be highly successful, yielding a profit of $10 million. There is a 50% probability of moderate success, yielding $2 million. There is a 10% probability of failure, resulting in a loss of $5 million.
What is the expected value of the profit from this drug development?
A biotech firm is developing a new drug. There is a 40% probability that the drug will be highly successful, yielding a profit of $10 million. There is a 50% probability of moderate success, yielding $2 million. There is a 10% probability of failure, resulting in a loss of $5 million.
What is the expected value of the profit from this drug development?
Answer options:
A.
$5.5 million
B.
$4.5 million
C.
$5.0 million
D.
$7.0 million
How to approach this question
Multiply each outcome by its probability and sum the results. Remember that a loss is a negative number.
Full Answer
B.$4.5 million✓ Correct
EV = (0.40 * $10m) + (0.50 * $2m) + (0.10 * -$5m)
EV = $4m + $1m - $0.5m = $4.5 million.
Common mistakes
Adding the $0.5m loss instead of subtracting it.
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