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Financial Expectation Probability Questions: Problem Solving Activities for Teenagers

July 13, 2013
Financial Expectation Probability Questions: Problem Solving Activities for Teenagers

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?

Answers to questions

  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.