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?

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