A bank is considering offering a loan of $100,000 to a client. If the loan is not
Question:
A bank is considering offering a loan of $100,000 to a client. If the loan is not offered, then the bank invests the $100,000 receives a sure payoff from the investment of $200 (i.e., receives $100,200 at the end of the year). Prior to a decision of whether or not to offer the loan, the bank can run a credit analysis on the client that returns one of two possible predictions:
(1) the client will default on the loan in which case the bank would lose $100,000,
(2) the client will pay back the loan with interest in which case the bank receives a payoff of $6,000 (i.e., receives $106,000 at the end of the year). The probability that the credit analysis will return the first prediction (client defaults) is 1%. What is the EVPI?
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders , Marcia Cornett