Question

Following is information on an investment in a manufacturing machine. The machine has zero salvage value. The company requires a 12% return from its investments.

Initial investment $ (200,000)
Net cash flows:
Year 1 100,000
Year 2 90,000
Year 3 75,000

Answer 1

The question pertains to creating probability distribution functions for different investment options to analyze their expected returns, which is related to the business field, particularly finance and investment analysis at the college level.

Step-by-step explanation:

The subject of the question is assessing the potential return and risk of different investment options, which is a fundamental aspect of business and specifically related to finance. The student is provided with three different investment options with various probabilities of profit and loss and is required to construct a probability distribution function (PDF) for each investment.

To create a PDF for each investment, multiply the potential returns by the probability of those returns occurring. This can then be used to calculate expected returns and evaluate which investment has the best risk-to-reward ratio according to the venture capitalist's preferences.

Example Calculation for Investment 1:

• Expected Profit: (10% × $5,000,000) + (30% × $1,000,000) - (60% × $1,000,000)
• Expected Profit: $500,000 + $300,000 - $600,000
• Expected Profit: $200,000