Consider two projects as represented in the following table. Each of these projects results in a new technology that the firm would like to incorporate in its product. As a result, it has value from only one of the technologies. How should it choose its projects and conduct these projects to maximize its portfolio value if the interest rate is 10%?

1. What is the expected value that can be obtained if the firm does A first and then B if necessary?

2. What is the expected value if the firm does B first and then A if necessary?

3. Which yields higher profits and why?

A B Project Cost 25mn 35mn Duration lyr rs Reward 120mn 60mn 400mn 10mn Probability 0.6 0.4 0.2 0.8 Table 1: Project Characteristics