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

Question

Quizplus · Accepted Answer

To determine the expected value of each project, we can use the following formula:

Expected value = (probability of success x value if successful) + (probability of failure x value if fails)

For project A:
Expected value = (0.6 x $200,000) + (0.4 x $50,000) = $140,000

For project B:
Expected value = (0.7 x $150,000) + (0.3 x $30,000) = $123,000

Since project A has a higher expected value, it is the better choice.

You Can Invest $100,000 into Either Project a or B