Question

You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table.

Project	Boom (60%)	Recession (40%)
A	$30	$20
B	-$10	$50
C	$40	-$30
D	$20	$40

Which project should the manager invest in? Explain in detail how you would present your selection to the firm.

If the manager were able to adopt project C and D simultaneously, is that a better option than the one selected in part a? Explain.

Answer 1

The project would be selected on the basis of the return that it generates

Expected return for all the aforesaid options:

A =[30*60%+20*40%]

=18+8

=26

B = [-10*60%+50*40%]

= -6+20

=14

C= [40*60%+(-30)*40%]

=24+(-12)

=12

D=[20*60%+40*40%]

=12+16

=28

As we see the maximum Return is given Option D hence it will be selected

Most importantly if the manager was able to adopt project C and D simultaneously then too it would be viable enough to sail through the recession as the total return in this case would be $40 (12+28).