Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 17, Problem 5MC
To determine
Calculate the probability of success.
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14. Suppose an investment project has an NPV of $75 million if it becomes successful and an NPV of –$25 million if it is a failure. What is the minimum probability of success above which you should make the investment?
Group of answer choicesa. 0.50b. 0.25c. 0.33d. 0.10
The project manager of Good Public Relations gatheredthe data shown in Table 7.15 for a new advertisingcampaign.a. How long is the project likely to take?
b. What is the probability that the project will take more than38 weeks?c. Consider the path A–E–G–H–J. What is the probability thatthis path will exceed 38 weeks?
1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) =
√e. He has an initial wealth of $1,000. He finds an investment opportunity. The project has a
startup cost of $1000, and a 9% chance of success. If the project succeeds, the payoff is $100,000;
if it fails, its payoff is $0.
(a) Would George invest in this project?
(b) Suppose George has an initial wealth of $100, 000 instead of $1,000. Would he invest in this
project?
(c) Comparing your answers in parts (a) and (b), how does George's risk appetite change? Why?
Chapter 17 Solutions
Managerial Economics: A Problem Solving Approach
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