A manufacturing firm is considering two mutually exclusive projects, both of which have an economic service life of one year with no salvage value. The initial cost and the net year-end revenue for each project are given in Table PI2.21.
Assume that both projects are statistically independent of each other.
(a) If you are an expected-value maximizer, which project would you select?
(b) If you also consider the variance of the project, which project would you select?
Table P12.21
Comparison of mutually Exclusive Project.

Transcribed Image Text:

First Cost Project 2 ($800) Project 1 ($1,000) Probability Revenue ProbabilityRevenue 0.2 0.6 0.2 $2.000 3,000 3.500 0.3 0.4 0.3 $1,000 2,500 4,500 Net revenue, given in PW