Question: A firm is considering three business projects. Project A will return a profit of $5,000 if conditions are poor, $10,000 if conditions are good, and
A firm is considering three business projects. Project A will return a profit of $5,000 if conditions are poor, $10,000 if conditions are good, and $15,000 if conditions are excellent. Project B will return a profit of $6,000 if conditions are poor, $8,000 if conditions are good, and $14,000 if conditions are excellent. Project C will return a profit of $3,000 if conditions are poor, $8,000 if conditions are good, and $20,000 if conditions are excellent.
- i. Complete the table below.
| Conditions Outcome | Probability | Project A | Project B | Project C | |||
| Poor | 0.2 | $5,000 | $6,000 | $3,000 | |||
| Good | 0.5 | 10,000 | 8,000 | 8,000 | |||
| Excellent | 0.3 | 15,000 | 14,000 | 20,000 | |||
| Expected Value | _______ | _______ | _______ | ||||
| Minimum Value | _______ | _______ | _______ | ||||
| Maximum Value | _______ | _______ | _______ | ||||
| Range | _______ | _______ | _______ | ||||
ii. Which project should the business choose considering each of the following decision rule?
- Most likely outcome: __________________
Why? _____________________________________________________________
__________________________________________________________________
- Maximum expected value: ________________
Why? _________
- Risk and returns comparison: ________________
Why? _____________________________________________________________
__________________________________________________________________
- Safety first (maxi-min): ____________________
Why? _____________________________________________________________
__________________________________________________________________
- Minimum return of $5,000: __________________
Why? ___________
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