Question

You are the sole shareholder and CEO of your own local newspaper. The company’s only assets are $25,000 in cash. In one year the company’s only bank loan is due. The principal together with the last interest payment amounts to $27,500. If the newspaper is unable to sell enough ads to repay, all its assets will be taken over by the bank. There are three investment opportunities available: (1) do nothing; (2) use the $25,000 to buy lottery tickets that will pay $2,500,000 in one year with probability 0.01 and $0 otherwise; and (3) investing the $25,000 in an advertisement salesperson training program that lasts one year and returns $50,000 with probability 0.50, and $25,000 otherwise. Assume the discount rate is 0%. Answer the following questions:a) Which of the 3 investment opportunities would you prefer?

Answer 1