F has debt with face value of 80,000, maturity 1 year, and interest rate of 5% and must invest in one of two projects A or B with the same systematic risk. If project A is chosen, then the expected value of F's assets in one year will be 220,000 in a boom (probability 1/4), 100,000 in recession (probability 1/4) and 50,000 in a depression (probability 1/2).

If project B is chosen, then the expected value of F's assets in one year will be 120,000 in each state of the world. Which project does F's owners pick?

Answer rating: 100% (QA)

For project A Expected value of Fs assets 14 x 220000 14 x 100000 12 x 50000 55000 25000 ... View the full answer