Asked by Bailey Williams on Sep 24, 2024
Verified
You can invest $100,000 into either project A or B.You estimate that A would succeed with a probability of 0.7 in which case it doubles in value.If it fails,its scrap value is $50,000.Project B would succeed with probability 0.6,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
To allocate resources, usually money, with the expectation of generating an income or profit.
Scrap Value
The estimated resale value of an asset at the end of its useful life, often considered in depreciation calculations.
- Examine and determine choices among different investment projects based on calculations of their expected values.
- Evaluate investment opportunities based on their success probabilities and resulting value.
Verified Answer
ST
Subin Tom Eappen3 days ago
Final Answer :
A
Explanation :
To calculate the expected value of each project, we multiply the probability of success by the value when successful, and add to it the probability of failure multiplied by the value when failed.
For Project A: (0.7 x 2 x $100,000) + (0.3 x $50,000) = $155,000
For Project B: (0.6 x $150,000) + (0.4 x $30,000) = $102,000
Therefore, Project A has the higher expected value and is the better choice for investment.
For Project A: (0.7 x 2 x $100,000) + (0.3 x $50,000) = $155,000
For Project B: (0.6 x $150,000) + (0.4 x $30,000) = $102,000
Therefore, Project A has the higher expected value and is the better choice for investment.
Learning Objectives
- Examine and determine choices among different investment projects based on calculations of their expected values.
- Evaluate investment opportunities based on their success probabilities and resulting value.