Question

A firm is considering three business projects. Project A will return a profit of $5,000 if conditions are poor, $10,000 if conditions are good, and $15,000 if conditions are excellent. Project B will return a profit of $6,000 if conditions are poor, $8,000 if conditions are good, and $14,000 if conditions are excellent. Project C will return a profit of $3,000 if conditions are poor, $8,000 if conditions are good, and $20,000 if conditions are excellent.

1. i. Complete the table below.

Conditions Outcome	Probability		Project A		Project B		Project C
Poor	0.2		$5,000		$6,000		$3,000
Good	0.5		10,000		8,000		8,000
Excellent	0.3		15,000		14,000		20,000
Expected Value		_______		_______		_______
Minimum Value		_______		_______		_______
Maximum Value		_______		_______		_______
Range		_______		_______		_______

ii. Which project should the business choose considering each of the following decision rule?

- Most likely outcome: __________________

Why? _____________________________________________________________

__________________________________________________________________

- Maximum expected value: ________________

Why? _________

- Risk and returns comparison: ________________

Why? _____________________________________________________________

__________________________________________________________________

- Safety first (maxi-min): ____________________

Why? _____________________________________________________________

__________________________________________________________________

- Minimum return of $5,000: __________________

Why? ___________

Answer 1

Answering first part of multi part question

Conditions Outcome	Probability	Project A	Project B	Project C
Poor	0.2	$5,000	$6,000	$3,000
Good	0.5	10,000	8,000	8,000
Excellent	0.3	15,000	14,000	20,000
Expected Value (sumproduct of probability and Outcome)		= 0.2*5000+0.5*10000+0.3*15000 =10,500	0.2*6000+0.5*8000+0.3*14000 =9,400	0.2*3000+0.5*8000+0.3*20,000 =14,600
Minimum Value (Lowest of three outcomes)		$5,000	$6,000	$3,000
Maximum Value (Highest of three outcomes)		15,000	14,000	20,000
Range (Between minimum and maximum value)		Between 5000 and 15,000	Between 6,000 and 14,000	Between 3,000 and 20,000