Question

Consider the following Project: Obtain $300,000 from assets: invest it in a project with a 10% chance of increasing asset value to $2,000,000 and a 90% chance of losing the entire investment (assets - $700,000 ). All figures are PV, what is the expected value of the equity with the project, and should the project be accepted? a. None of the answers are correct b. $220,000 and yes, accept project c. $−170,000 and yes, accept project d. $−430,000 and yes, accept project e. $−170,000 and no, do not accept project

Answer 1

The expected value of equity with the project is -$70,000, as there is a 10% chance of making $2,000,000 and a 90% chance of losing $300,000. This negative expected value indicates that on average, the project is not financially viable and should not be accepted.

Step-by-step explanation:

To calculate the expected value of the equity with the project, we need to take into account the different outcomes and their probabilities. The expected value (EV) is the sum of all possible values each multiplied by the probability of its occurrence.

In this case:

• There is a 10% chance the assets increase to $2,000,000, so the expected value for this outcome is 0.10 * $2,000,000 = $200,000.
• There is a 90% chance of losing the entire investment, so the expected value for this outcome is 0.90 * -$300,000 = -$270,000.

Adding these together:

EV = $200,000 - $270,000 = -$70,000

This means the expected value of undertaking the project is -$70,000, which suggests that, on average, the project will lead to a loss. Therefore, it is not advisable to accept the project.