Part Three Ten firms are considering taking on risky projects. For each, if the

Question

Part Three Ten firms are considering taking on risky projects. For each, if the project is not successful, it will fail, and the firm will earn $0. Probabilities of success, and payoffs if the projects are successful, are described in the below table: Firm Probability of Success (Otherwise, Failure) 80% 70% 90% 82% 100% 72% 80% 94% 75% 90% Payoff if Successful $5,300 $4,800 $7,200 $5,600 $6,500 $5,000 $5,500 $6,850 $5,750 6,100 Use Excel to calculate the expected value for each firm's project (5 points total). Then assume that each firm's manager will experience utility as described by the following utility function as a result of undertaking the project:

Explanation / Answer

In order o calculate Expected Value of the given cash flow in Excel, use the following formula:

=SUMPRODUCT(probabilities, values)

This will give the value of EV, which mathematically is calculated as:

EV = sum of (probability*value) of all values.

This will give the value of EV

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