Question: The possible payoffs from Ms. Ketchups projects (see Section 18.3) have not changed but there is now a 40 percent chance that project 2 will

The possible payoffs from Ms. Ketchup’s projects (see Section 18.3) have not changed but there is now a 40 percent chance that project 2 will pay off $24 and a 60 percent chance that it will pay off $0.

(a) Recalculate the expected payoffs to the bank and Ms. Ketchup if the bank lends the present value of $10. Which project would Ms. Ketchup undertake?

(b) What is the maximum amount the bank could lend that would induce Ms. Ketchup to take project 1?

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