Question

Imagine that you are asked to evaluate the five-year viability of a new consulting firm, ConsultIng. Based on your prior research, you have established that 20% of similar firms in this area survive for at least five years, with 80% going out of business within this period. However, your research also reveals that 90% of non-surviving firms had asset/liability ratios which were worse than that of ConsultIng, as opposed to 50% of surviving firms. What is the probability that ConsultInc will survive for at least five years?

Answer 1

Answer:

Probability of Consulting surviving is 0.56

Step-by-step explanation:

The probability of Consulting surviving= (Probability of surviving)/{(Probability of not surviving) + (Probability of surviving)}

Define terms:

Survival based on research (S1)=20%=0.2

Survival based on asset/liability ratio(S2)= 50%=0.5

Non-survival based on research(F1)= 80%=0.8

Non-survival based on asset/liability ratio(F2)= 100-90=10%= 0.10

Therefore

Probability of survival=(S1*S2)/ {(S1*S2)+(F1*F2)}

= (0.2*0.5)/{(0.2*0.5)+(0.8*0.1)}

=0.1/(0.1 + 0.08)

= 0.1/0.18

= 0.56