Asked by Bianca LaForteza on Jun 11, 2024
Verified
You can invest $100,000 into either project A or B.You estimate that A would succeed with a probability of 0.5 in which case it doubles in value.If it fails,its scrap value is $50,000.Project B would succeed with probability 0.8,in which case it would have a value of $150,000.If it fails,project B's scrap value is $30,000.Which project should you invest in?
A) Project A
B) Project B
C) Neither of the projects
D) You cannot tell from the information presented
Invest
Allocating resources, usually money, with the expectation of generating an income or profit.
Scrap Value
The estimated residual value of an asset after it has reached the end of its useful life, often associated with the material worth of its components.
- Evaluate and choose among distinct investment opportunities through the computation of expected values.
- Assess investment options by examining their likelihood of success and the potential value they offer.
Verified Answer
NS
Nathan SandersonJun 14, 2024
Final Answer :
B
Explanation :
We can calculate the expected value of each project to determine which one has a higher potential return:
Project A:
E(A) = 0.5($200,000) + 0.5($50,000) = $125,000
Project B:
E(B) = 0.8($150,000) + 0.2($30,000) = $132,000
Therefore, project B has the higher expected value and would be the best choice for investment.
Project A:
E(A) = 0.5($200,000) + 0.5($50,000) = $125,000
Project B:
E(B) = 0.8($150,000) + 0.2($30,000) = $132,000
Therefore, project B has the higher expected value and would be the best choice for investment.
Learning Objectives
- Evaluate and choose among distinct investment opportunities through the computation of expected values.
- Assess investment options by examining their likelihood of success and the potential value they offer.