An engineering firm is faced with the task of preparing a proposal for a researc
ID: 3224549 • Letter: A
Question
An engineering firm is faced with the task of preparing a proposal for a research contract. The cost of preparing the proposal is $5000, and the probabilities for a potential gross profit of $50,000, $30,000, $10,000, or $5000 are .2, .4, .3, and .1, respectively, provided the proposal is accepted. If the probability is .5 that the firms proposal will be accepted, what is its expected net profit? (Here, net profit = gross profit minus the cost of preparing the proposal.)
THe answer is $7750 but i need to know the steps involved. Thank you!
Explanation / Answer
Solution :- If proposal is accepted then we will have the expected profit of
= 50000 * .2 + 30000 * .4 + 10000 * .3 + 5000 *.1
= $ 25,500
Since proposal is accepted with probability .5 and otherwise nothing is gained, then finally gross expected profit would be -
= 25500 * .5 + 0 * .5
= $ 12750
The cost of preparing the proposal is $5000 then Net expected profit must be
= 12750 - 5000
= $ 7750
Answer
TY!s