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You can either invest in Project A or B. Project A could have a value of...

You can either invest in Project A or B. Project A could have a value of $150 with a probability of 0.1 or a value of $75 with a probability of 0.9. Project B could have a value of $110 with a probability of 0.2 or a value of $65 with a probability of 0.8. Which project should you invest in?

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Answer #1

Expected value of a project is calculated as: Probability of occurrence of value * Value + Probability of occurrence of another value * another Value

Project A:

Probability of 0.1 to have a value of $150

Probability of 0.9 to have a value of $75

Expected Value = 0.1 * 150 + 0.9 * 75 = 82.5

Project B:

Probability of 0.2 to have a value of $110

Probability of 0.8 to have a value of $65

Expected Value = 0.2 * 110 + 0.8 * 65 = 74

You should invest in project A which have higher expected value.

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