TOPIC: EMV calculation question

How is the following type of question calculated?
If a business has 50% chances to earn $5 million and 30% chances to lose $2.5 million
What is the EMV?

Ashwin,

Allow me to ask a question in return... where is this from and what do they say the answer is?

Hi Cornelius,

I have found similar ones in few tests but unable to understand how the cost is calculated. The figures are updated so I wouldn't have the right answer.

The rough calculation goes as follows:-

EMV = (5 Million x 50%) + (-2.5 x 30%)
= (2.5) + (Not sure how the cost is calculated here)

Hi,

The calculation is very simple.

Your Question :- If a business has 50% chances to earn $5 million and 30% chances to lose $2.5 million
What is the EMV?

Answer:-

EMV = (50/100 * 5 million) + (30/100 * - 2.5 million)
EMV = 2500000 + (-750000)
EMV = 1750000

If you see I have take -2.5 million is the second part of the formula, because its a loss

I hope this will clear your doubt.

$5m x 0.5 = $2.5m
-$2.5 x 0.3 = -$750,000

$2.5m - $750,000 = $1.75m

1.75 million