Question

Shawn and Maddie purchase a foreclosed property for $50,000 and spent an additional $27,000 fixing up the property. They feel they can sell the property for $120,000 with probability 0.15, $100,000 with probability 0.45, $80,000 with probability 0.25, and $60,000with probability 0.15. Compute and interpret the expected profit for reselling the property

Answer 1

Answer:

The expected profit for reselling the property is $15,000.

Explanation:

Shawn and Maddie purchase a foreclosed property for $50,000 and spent an additional $27,000 fixing up the property.

The total cost of property

= Purchase cost + fixing cost

= $50,000 + $27,000

= $77,000

If they sell the property at $120,000, the expected value of profit

= $Profit\ \times\ Probability$

= $(\ 120,000\ -\ 77,000)\ \times\ 0.15$

= $6,450

If they sell the property at $100,000, the expected value of profit

= $Profit\ \times\ Probability$

= $(\ 100,000\ -\ 77,000)\ \times\ 0.45$

= $10,350

If they sell the property at $120,000, the expected value of profit

= $Profit\ \times\ Probability$

= $(\ 80,000\ -\ 77,000)\ \times\ 0.25$

= $750

If they sell the property at $120,000, the expected value of profit

= $Profit\ \times\ Probability$

= $(\ 60,000\ -\ 77,000)\ \times\ 0.15$

= - $2,550

Total expected profit

= $6,450 + $10,350 + $750 + (- $2,550)

= $15,000