CIMA BA2 · Chapter 9 · Question 3 of 11
A risk-neutral manager must choose between two mutually exclusive projects: Project X: profit $60,000 (probability 0.4) or $20,000 (probability 0.6) Project Y: profit $90,000 (probability 0.3), $10,000 (probability 0.5) or a loss of $5,000 (probability 0.2) Which project should be chosen and what is its expected profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Project X, with an expected profit of $36,000
Explanation
EV of X = ($60,000 x 0.4) + ($20,000 x 0.6) = $24,000 + $12,000 = $36,000. EV of Y = ($90,000 x 0.3) + ($10,000 x 0.5) - ($5,000 x 0.2) = $27,000 + $5,000 - $1,000 = $31,000. A risk-neutral manager chooses the higher expected value, so Project X.
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