Question

You can invest $100,000 into either project A or B. You estimate that A succeeds with probability 0.7 in which case it doubles in value. If it fails, the scrap value is worth $50,000. Project B succeeds with probability 0.6, has value $150,000 if it succeeds and value of $30,000 if not. a) You should invest in project A b) You should invest in project B c) You should not invest in either d) You cannot tell from the information presented

Answer 1

Answer: a) you should invest project A

Step-by-step explanation:

It is far more better to invest the $100,000 into project A because:

i) project A has higher probability of success whrn compared to project B (0.7 to 0.6). i.e it is more likely to succeed when you invest in project A than B.

ii) project A has higher interest/values when it succeeds

than project B ( $200,000 to $100,000). i.e success of project A brings about more interest.

iii) project A also have high scrap value when it fails than project B ( $50,000 to $30,000)

I believe with all these reasons it is better to invest in project A.