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This is [.70 × $10,000,000] + [.75 × $(4,000,000)]. The expected value of the new product's annual profit is a weighted average of the expected value of profits with favorable research results and the expected value of profits with unfavorable research results.
This is the average of $10,000,000 and $(4,000,000). The expected value of the new product's annual profit is a weighted average of the expected value of profits with favorable research results and the expected value of profits with unfavorable research results.
The expected value of the new product's annual profit is a weighted average of the expected value of profits with favorable research results and the expected value of profits with unfavorable research results. The expected value of profits with favorable research results is [.70 × $10,000,000] + [.30 × $(4,000,000)] = $5,800,000. The probability that the research results will be favorable is 60%. The expected value of profits with unfavorable research results is [.25 × $10,000,000] + [.75 × $(4,000,000)] = $(500,000). The probability that the research results will be unfavorable is 40%. The expected value of the new product's annual profit is [.60 × $5,800,000] + [.40 × $(500,000)] = $3,280,000.
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