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 1 is a fixed fee project, where Big Construction Company will generate a profit of R150 million. The profit of Option 2 on the other hand is uncertain. The Directors believe that option 2 has a 20% probability of generating R275 million, a 50% probability of generating R100 million and a 30% probability of returning a profit of R80 million. Calculate the expected monetary values of options 1 and 2 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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