(2) An individual is considering two investment projects. Project A wil return a

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(2) An individual is considering two investment projects. Project A wil return a zero profit if conditions are poor, a profit of $4 if conditions are good, and a profit of $8 if conditions are excellent. Project B will return a profit of $2 if conditions are poor, a profit of $3 if conditions are good, and a profit of $4 if conditions are excellent. The probability distribution of conditions is as follows: Conditions: Poor Good Excellent Probability: 40% 50% 10% (a) Using Excel, calculate the expected value of each project and identify the preferred project according to this criterion. (b)Assume that the individual

Explanation / Answer

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Project A

zero profit if conditions are poor,

a profit of $4 if conditions are good,

a profit of $8 if conditions are excellent.

Project B will return

a profit of $2 if conditions are poor,

a profit of $3 if conditions are good,

a profit of $4 if conditions are excellent.

Poor Good Excellent : 40% 50% 10%

Since excel table cannot be attached I am going to solve it for you manually though its real hard work :(

expected value of project A:

E[A]= 0*0.4+ 4*0.5 + 8*0.1 = 2.8

expected value of project B:

E[B]= 2*0.4 + 3*0.5 + 4*0.1 = 2.7

So project A is prefered

individual

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