Asked by Ashley Sedelnick on Mar 10, 2024

Verified

You can either invest in project A or B.Project A could have a value of $150 with a probability of 0.1 or a value of $75 with probability 0.9.Project B could have a value of $120 with probability 0.2 or a value of $75 with a probability of 0.8.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

A) Project A

B) Project B

C) Neither of the projects

D) You cannot tell from the information presented

Invest

To assign financial resources with the aim of achieving a return or profit.

Probability

A measure of the likelihood of a specific event or outcome occurring, often expressed as a ratio or percentage.

- Consider and make selections between diverse investment ventures by estimating their expected financial outcomes.

Verified Answer

KW

Katie Westcott

Mar 10, 2024

Final Answer :

B

Explanation :

To determine the expected value (EV) of each project, we use the formula:

EV = (probability of outcome 1 x value of outcome 1) + (probability of outcome 2 x value of outcome 2)

For Project A:

EV = (0.1 x 150) + (0.9 x 75) = 22.5 + 67.5 = $90

For Project B:

EV = (0.2 x 120) + (0.8 x 75) = 24 + 60 = $84

Therefore, based on the expected value, it is better to invest in Project B.

EV = (probability of outcome 1 x value of outcome 1) + (probability of outcome 2 x value of outcome 2)

For Project A:

EV = (0.1 x 150) + (0.9 x 75) = 22.5 + 67.5 = $90

For Project B:

EV = (0.2 x 120) + (0.8 x 75) = 24 + 60 = $84

Therefore, based on the expected value, it is better to invest in Project B.

## Learning Objectives

- Consider and make selections between diverse investment ventures by estimating their expected financial outcomes.