For the next five questions, consider the economy of Columbia. In this economy,

Question

For the next five questions, consider the economy of Columbia. In this economy, there are three firms potentially interested in issuing a $25,000 bond to do a project each hopes will be profitable The Heckle Firm has a 70% chance of a $40,000 return. The Ickle Firm has an 80% chance of a $38,000 return. The Jackle Firm is credibly guaranteed to get a $30,000 return. The only other possibility for all firms is failure, a $O return. Assume that these firms will issue bonds as long as savers want them. Calculate the expected value of the Ickle Firm's project. Carefully follow all numeric instructions.

Explanation / Answer

Expected value of the Ickle firm’s project = 80%*38000 + (1-80%)*0

Expected value of the Ickle firm’s project = $30400

So, the expected value of Ickle firm’s project is $30400.

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