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29 September, 18:31

An architect is considering bidding for the design of a new shopping mall. The cost of drawing plans and submitting a model is $10,000. The probability of being awarded the bid is 0.12, and anticipated profits are $100,000, resulting in a possible gain of this amount minus the $10,000 cost for plans and a model. What is the expected value in this situation?

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  1. 29 September, 18:45
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    The expected value is $2,000

    Explanation:

    The expected value in the following situation is computed as:

    Expected value = Probability of bid * (Anticipated Profits - Cost of drawing plans) - (1 - Probability of bid) * Cost of drawing plans

    where

    Probability of bid is 0.12

    Anticipated Profits is $100,000

    Cost of drawing plans is $10,000

    Putting the values above:

    = 0.12 * ($100,000 - $10,000) - (1 - 0.12) * $10,000

    = 0.12 * $90,000 - 0.88 * $10,000

    = $10,800 - $8,800

    = $2,000
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