You can invest $100,000 into either project a or b. you estimate that a succeeds with probability 0.7

2 answers
Question:

You can invest $100,000 into either project a or b. you estimate that a succeeds with probability 0.7 in which case it doubles in value. if it fails, the scrap value is worth $50,000. project b succeeds with probability 0.6, has value $150,000 if it succeeds and value of $30,000 if not. a) you should invest in project a b) you should invest in project b c) you should not invest in either d) you cannot tell from the information presented

Answers

a) you should invest project A

Explanation:

It is far more better to invest the $100,000 into project A because:

i) project A has higher probability of success whrn compared to project B (0.7 to 0.6). i.e it is more likely to succeed when you invest in project A than B.

ii) project A has higher interest/values when it succeeds

than project B ( $200,000 to $100,000). i.e success of project A brings about more interest.

iii) project A also have high scrap value when it fails than project B ( $50,000 to $30,000)

I believe with all these reasons it is better to invest in project A.

You should invest in project

Explanation:

We calcualte the expected project value by weigh each outcome with their probability of occurence:

Project A

0.7 x 200,000 = 140,000

0.3 x   50,000 =   15,000

                          155,000

Project B

0.6 x 150,000  =  90,000

0.4 x  30,000  =   12,000

                           102,000

I would invest in project A as the expected value is greater than project B

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