Tom Wilson is the operations manager for BiCorp, a real estate investment firm. Tom must decide if BiCorp is to invest in a strip mall in a northeast metropolitan area. If the shopping center is highly successful, after tax profits will be $100,000 per year. Moderate success would yield an annual profit of $50,000, while the project will lose $10,000 per year if it is unsuccessful. Past experience suggests that there is a 40% chance that the project will be highly successful, a 40% chance of moderate success, and a 20% probability that the project will be unsuccessful.
a. Calculate the expected value and standard deviation of profit.
b. The project requires an $800,000 investment. If BiCorp has an 8% opportunity cost on invested funds of similar riskiness, should the project be undertaken?

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DEEPIGA K 18MBR011 · Accepted Answer

Final Answer : a.Expected Value  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload > =  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload > 100,000 .4 40,00050,000 .4 20,000-10,000 .2 -2,000 _____________   _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload > = 58,000Standard deviationσ =  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload >  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload > P i 100,000 42,000 1,764,000,000 705,600,00050,000 -8,000 64,000,000 25,600,000-10,000 -68,000 4,624,000,000 924,800,000  _____________    = 58,000 Standard deviation σ =           P i  100,000 42,000 1,764,000,000 705,600,000 50,000 -8,000 64,000,000 25,600,000 -10,000 -68,000 4,624,000,000 924,800,000   = 1,656,000,000 σ = 40,693.98 b.Bio-Corp's opportunity cost is 8% of 800,000 or 0.08 × 800,000 = 64,000. The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project. class=answers-bank-image d-inline rel=preload > = 1,656,000,000σ = 40,693.98b.Bio-Corp's opportunity cost is 8% of 800,000 or0.08 × 800,000 = 64,000.The expected value of the project is less than the opportunity cost. Bi-Corp should not undertake the project.

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