Detailed Answer
Answer (C) is correct.
The expected value of an event is calculated by multiplying the
probability of each outcome by its payoff and summing the products. The
expected value of $7,800,000 is calculated as follows:
1. 0.20 [($100 × 600,000) – ($60 × 600,000)] = 4,800,000
2. 0.50 [($100 × 800,000) – ($60 × 800,000)] = 16,000,000
3. 0.30 [($100 × 1,000,000) – ($60 × 1,000,000)] =
12,000,000
4. (4,800,000 + 16,000,000 + 12,000,000) – 25,000,000
fixed cost = 7,800,000