Ultra Co. is considering two mutually exclusive projects, both of which have an economic service life of one year with no salvage value. The initial cost and the net-year-end revenue for each project are given in the following table:
Project 1 |
Project 2 |
|||
Initial Cost |
$1,200 |
$1,000 |
||
Probability |
Revenue |
Probability |
Revenue |
|
Net Revenue given in PW |
0.25 |
$1,800 |
0.3 |
$2,400 |
0.35 |
$2,200 |
0.3 |
$1,600 |
|
0.15 |
$3,500 |
0.2 |
$2,700 |
|
0.25 |
$2,600 |
0.2 |
$2,800 |
Assuming both projects are statistically independent of each other,
a.
Expected Value for each project | |||||
Project 1 | Project 2 | ||||
Probability | Revenue | Expected Value | Probability | Revenue | Expected Value |
0.25 | $ 1,800 | $ 450 | 0.3 | $ 2,400 | $ 720 |
0.35 | $ 2,200 | $ 770 | 0.3 | $ 1,600 | $ 480 |
0.15 | $ 3,500 | $ 525 | 0.2 | $ 2,700 | $ 540 |
0.25 | $ 2,600 | $ 650 | 0.2 | $ 2,800 | $ 560 |
$ 2,395 | $ 2,300 |
b. The variance between the two projects:
Project 1 has more expected value by $95 and more initial cost by $200
Net variance is $105
c. Project 2 should be chosen because it has a net benefit of $1,300 ($2300-$1000). while Project 1 has a net benefit of $1195 ($2395-1200)
Ultra Co. is considering two mutually exclusive projects, both of which have an economic service life...
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