Question: Big Construction Company, a risk neutral developer, is considering two alternative projects for the purposes of investing in one of them. Option 1 is a
Big Construction Company, a risk neutral developer, is considering two alternative projects for the purposes of investing in one of them. Option is a fixed fee project, where Big Construction Company will generate a profit of R million. The profit of Option on the other hand is uncertain. The Directors believe that option has a probability of generating R million, a probability of generating R million and a probability of returning a profit of R million. Calculate the expected monetary values of options and and advise which option Big Construction Company would select. Which alternative would a risk seeking company be likely to select? Why?
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