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King, Inc., a successful Midwest firm, is considering opening a branch office on the west coast. Under normal economic conditions, with a 45% probability of occurring, King can expect to earn a net income of $50,000 per year. In a mini-recession, at 25% probability, King will earn $20,000. In a severe recession, at a 20% probability, King will lose $10,000. There is also a slight probability 10% that King will lose $300,000 if the expansion fails and the branch office must be closed.

Based solely on expected value, should King open a branch office in California? (Show your work/calculations/formulas)

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Solution Summary

The solution eplains how to calculate the expected value and make the branch opening decision

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