square root of 2: Not quite. I think it would be more practical to break down your argument in a more syllogistic form and answer it thus.
You question:
Premise A) Hashem created the world in order to bestow the ultimate good.
Premise B) Hashem knows ultimately that certain people would not be able to receive this good.
Conclusion (question) C) Therefore, why did Hashem create those people.
Before I get to my answer, I think it prudent to clarify these points. In the statement of premise A lies some hidden propositions. First of all, THIS is the reason why Hashem created the world from the start. Secondly, the Ultimate good referred to here means the reward in the world to come which cannot be a “free gift”. Premise B implies that regardless as to HOW Hashems’ “knowing” that someone would not turn out righteous, and will therefore not be deserving of the Ultimate Good; this knowing does not take away his free will to act as he wishes.