Expected Value

Problem

Given:

The profits of an investment depend on the tax rate on a competing product
If there is a high tax on the other product, this investment will have a PV of $100 million
If there is a low tax, the PV will be $50 million
If there is no tax at all, the PV will be -$200 million
The chances of different taxes are: high 20%, low 50%, none 30%

Determine:

The expected PV of the investment.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 12/08/2011