John Is Trying to Decide Whether to Expand His Business

question 93

Multiple Choice

John is trying to decide whether to expand his business or not.If he continues his business as it is,with no expansion,there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000.If he does expand,there is a 30 percent chance he will earn $100,000,a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000.It will cost him $150,000 to expand.If John were to expand,which of the following is true?

• A)John's expected earnings are $50,000 less than if he didn't expand.
• B)John can expect to earn $120,000 more by expanding,but that is less than the cost of expansion,$150,000.
• C)John can expect to earn $120,000 more by expanding and so made the most profitable decision.
• D)All of these statements are true.

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Definitions:

Operating Agreement

A contract among the members of a Limited Liability Company (LLC) that outlines the business's financial and functional decisions including provisions for its governance and operation.

Buyout Price

The predetermined amount of money required to purchase all or a specified percentage of ownership in a company or asset.

Dissociation

The process by which a member's involvement in an entity or partnership is terminated, often involving the alteration of the entity's legal and financial relationships.

Operating Agreement

A legal document outlining the governance and business operations of an LLC, agreed upon by its members.