Question:

A company is considering investing in a project that has an initial cost of $1,000,000 and a payoff of $2,500,000 after 5 years. However, the company is uncertain about the actual payoff and estimates that it could range from $2,000,000 to $3,000,000 with equal probability. The risk-free interest rate is 3%.

a) Calculate the expected payoff of the project. b) Calculate the variance of the project's payoff. c) Should the company invest in the project if it requires a minimum return of 8%?

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