The Head of Operations for a Movie Studio Wants to Determine

question 129

Multiple Choice

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production. (Due to budgeting constraints, only one new picture can be undertaken at this time.) She feels that script 1 has a 70 percent chance of earning about $10,000,000 over the long run, but a 30 percent chance of losing $2,000,000. If this movie is successful, then a sequel could also be produced, with an 80 percent chance of earning $5,000,000, but a 20 percent chance of losing $1,000,000. On the other hand, she feels that script 2 has a 60 percent chance of earning $12,000,000, but a 40 percent chance of losing $3,000,000. If successful, its sequel would have a 50 percent chance of earning $8,000,000, but a 50 percent chance of losing $4,000,000. Of course, in either case, if the original movie were a flop, then no sequel would be produced.
What is the expected value for the optimum decision alternative?

• A)$15,000,000
• B)$9,060,000
• C)$8,400,000
• D)$7,200,000
• E)$6,000,000

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Definitions:

Accounts Receivable

Funds that customers have yet to pay a company for the products or services they have received.

Contra Account

An account used in the ledger to offset the balance of a related account.

Carrying Amount

The net value of an asset as recorded in the books, which is equal to the asset's original cost minus any accumulated depreciation, amortization, or impairment charges.