An investor is considering applying for a grant. The cost of filling in the grant application is
Question:
An investor is considering applying for a grant. The cost of filling in the grant application is $5,000, the probability of the grant application being successful is 0.25, and the probability of the grant not being funded is 0.75. If the grant application is submitted and funded, then there are three possibilities. One possibility is choosing a technology which costs an additional $1,000 which either will return $24,000 with probability 0.5 or will return $16,000 with probability 0.5. Another possibility is choosing a technology which costs an additional $8,000 which either will return $160,000 with probability 0.2 or will return $10,000 with probability 0.8. Another possibility is choosing a technology which costs an additional $16,000 which either will return $40,000 with probability 0.6 or will return $50,000 with probability 0.4.
In terms of expected return, which - if any - is the best option? Give the single best answer.
Select one:
a. There is no one single best option. There are two options which are equally as good as one another and both better than the other options. Equivalently, in other words, there are two equally good options which are both better than the other options.
b. Apply for the grant and then, if the grant is successful, choose the technology which costs an additional $1,000 which either will return $24,000 with probability 0.5 or will return $16,000 with probability 0.5
c. Apply for the grant and then, if the grant is successful, choose the technology which costs an additional $16,000 which either will return $40,000 with probability 0.6 or will return $50,000 with probability 0.4
d. Apply for the grant and then, if the grant is successful, choose the technology which costs an additional $8,000 which either will return $160,000 with probability 0.2 or will return $10,000 with probability 0.8
e. Do not apply for the grant
Business Statistics a decision making approach
ISBN: 978-0133021844
9th edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry