probability An investor wants to open a bakery and she is co

An investor wants to open a bakery and she is considering locations at two different shopping centers. Use expected value to determine which location she should use. Location 1: According to her consultant, if the bakery is successful, she can anticipate an annual profit of $500,000. If it\'s not successful, she can anticipate an annual loss of $200,000. The probability of success at this location is 0.6. Location 2: According to her consultant, if the bakery is successful, she can anticipate an annual profit of $400,000. If it s not successful, she can anticipate an annual loss of $120,000. The probability of success at this location is 0.8. Which location is better?

Solution

location 1

500,000 * 0.6 + 0.4* -200,000 = 220,000

location 2

400,000 * 0.8 + 0.2 * -120,000 = 296,000

location 2 is better because it gives you expected value more bigger than location 1