For the next five questions, consider the economy of Columbia. In this economy,
ID: 2825553 • Letter: F
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 $0 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
Icke's firm project has 80% probability of earning profit of $38,000 and 20% probability of $0.
Expected VAlue of Icke's firm's Project = 80% of $38,000 + (100% - 80%) * $0= $30,400 + $0 = $30,400
Hence the Value of Icke's firm project is $30,400