# Financial Expectation Probability Questions: Problem Solving Activities for Teenagers

July 13, 2013

#### Financial expectation probability questions – problem solving activities for teenagers

Main aim: Students combine practice questions on financial expectation and learn about business financial expectations.

Name: Financial Expectation Probability Questions

Type: Problem solving activities for teenagers

Participants: Individuals

Duration: 30 minutes

Preparation: None

Materials: Pen, paper and calculator

### Instructions

• Instruct the students to solve the financial expectation questions using the standard financial expectation formula.
• Discuss the relevance of the calculations to real business financial expectations using the points and explanations below.

### Financial expectation questions

1. Amy has a 40% chance of making a profit of \$8000 and a 70% chance of making a profit of \$2000 in her breakfast bar business. Calculate the financial expectation.
2. The probability of making a profit of \$2500 is 1/4, a profit of \$500 is 1/2 and a \$3000 loss is 1/4. Calculate the financial expectation.
3. Joe bought 2 tickets in a raffle where the 1st prize was worth \$1000. Each ticket cost \$5 and 500 tickets were sold. What is Joe’s financial expectation?
4. Ravin bought 1 ticket in a raffle in which 1000 tickets were sold. The 1st prize is \$500.
• (a) What is Ravin’s financial expectation if there is just one prize for the raffle?
• (b) If there are 3 prizes, with the 2nd prize worth \$200 and 3rd prize worth \$100), would Ravin’s financial expectation improve?

1. (40% x \$8000) + (60% x \$1000) = \$3800
2. ((1/4 x \$2500) + (1/2 x \$500) + 1/4 x -\$3000) = \$125
3. (2/500 x \$1000) + (498/500 x -\$10) = -\$5.96
4. (a) 1/1000 x \$500 = \$0.50; (b) (1/1000 x \$500) + (1/1000 x \$200) + (1/1000 x \$100) = \$0.80, so yes, Ravin’s expected return will improve.

### Business financial expectations in the marketplace

Calculating expectations allows a business owner to determine whether a venture is viable or not. A positive answer means that the venture may be viable and the amount calculated represents the profit that can be expected for the venture.

A negative answer on the other hand means that the business venture is likely to return a loss.

Determining the viability of a business venture before investing into the venture is important for the following reasons:

• it allows the business owner to decide whether to start the business or invest in the venture or not;
• measuring business outcome is important to ensure that the business is profitable;
• it provides a target for achieving business success.

### Financial expectation vs return on investment (ROI)

Return on investment or ROI is another method of calculating the viability of a business venture.

ROI is based on percentage of return using the following formula:

return on investment (%) = net profit / investment x 100

WHERE:

• Net profit = gain from investment – cost of investment
• Investment = cost of investment

Both the financial expectation and ROI metrics offer business owners and investors an overview of business venture viability.