You are considering investing in two independent projects: A and B. Project A requires an initial investment of $12,000. In one year, there is a 30% chance of a $10,500 return; a 50% chance of a $12,500 return; and a 20% chance of a $14,500 return. Project B requires an initial investment of $1,000. In one year, there is a 25% chance of a $950 return; a 25% chance of a $1,000 return; and a 50% chance of a $1,200 return. If you require a 7% return on your investment after one year, you should:
A)accept Project A and reject Project B
B)accept Project B and reject Project A
C)accept both projects
D)reject both projects

Question

Quizplus · Accepted Answer

Project A's expected return is calculated as (0.3 * $10,500) + (0.5 * $12,500) + (0.2 * $14,500) - $12,000 = $1,150, which is less than the required 7% return of $840 ($12,000 * 0.07). Project B's expected return is (0.25 * $950) + (0.25 * $1,000) + (0.5 * $1,200) - $1,000 = $137.50, which is greater than the required 7% return of $70 ($1,000 * 0.07). Therefore, only Project B meets the required return.

You Are Considering Investing in Two Independent Projects: a and B