A potential purchaser of a ferry across a river knows that if a flow of 100,000...

 

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A potential purchaser of a ferry across a river knows that if a flow of 100,000 cfs or more occurs, the ferry will be washed downstream, over a low dam and destroyed. He knows that the probability of a flow of this kind in any year is 0.05. He also knows that for each year that the ferry operates a net profit of $10,000 is realized. The purchase price of the ferry is $50,000. Sketch the probability distribution of the potential net profit over a period of years neglecting interest rates and other complications. Assume that if a flow of 100,000 cfs or more occurs in a year, the profit for that year is zero. A potential purchaser of a ferry across a river knows that if a flow of 100,000 cfs or more occurs, the ferry will be washed downstream, over a low dam and destroyed. He knows that the probability of a flow of this kind in any year is 0.05. He also knows that for each year that the ferry operates a net profit of $10,000 is realized. The purchase price of the ferry is $50,000. Sketch the probability distribution of the potential net profit over a period of years neglecting interest rates and other complications. Assume that if a flow of 100,000 cfs or more occurs in a year, the profit for that year is zero.

Answer rating: 100% (QA)

Solution The probability of such a flood is 5 and we can say t... View the full answer