You can invest $100,000 into either project A or B. You estimate that A would succeed with a probability of 0.6 in which case it doubles in value. If it fails, its scrap value is $50,000. Project B would succeed with probability 0.7, 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

Question

Sabrina Frye

Business

7 October, 11:33

You can invest $100,000 into either project A or B. You estimate that A would succeed with a probability of 0.6 in which case it doubles in value. If it fails, its scrap value is $50,000. Project B would succeed with probability 0.7, 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

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Answers (1)

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Lilia Frye · Answer 1

a. Project A

Explanation:

The computation of the expected return is shown below:

For Project A

= (0.6 * $200,000 + 0.4 * $50,000)

= $120,000 + $20,000

= $140,000

For Project B

= (0.7 * $150,000 + 0.3 * $30,000)

= ($105,000 + $9,000)

= $114,000

Since in the Project A, the value doubles means = $100,000 * 2

And, if the succeeding percentage is 0.6 then its failing percentage is 0.4

So as we that the project A has an high expected return than the Project B so the Project A should be invested