A risk=adverse manager is considering two projects. the first project involves e

Question

A risk=adverse manager is considering two projects. the first project involves expanding the market for hotdog; the second involves expanding the market for Champaign drink. There is a 10 percent chance for a recession and a 90 percent chance for a economic boom. During a boom, the hotdog project will lose $10,000.00 whereas the Champaign drink project will earn $20,000.00. During a recession, the hotdog project will earn $12,000.00 and the Champaign project will lose $8,000.00. If the alternative is earning $3,000.00 on government Treasury bill (T-bill), what should the manager do? Why?

Explanation / Answer

expected return for hot dog project = -0.9*10000+0.1*12000 = 7800

expected return for Campagne drink = 0.9*20000-0.1*8000 = 17200

on treasury bil return = 3000

so Champane drink project should be selected

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