Question 7 1. ining Corporation is considering a new mining venture in Indonesia

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Question 7 1. ining Corporation is considering a new mining venture in Indonesia. There are two uncertainties associated prospect; the metallurgical properties of the ore and the net price (market price minus mining and with this transportation costs) of the ore in the future. The metallurgical properties of the ore would be classified as either "high grade" or "low grade". Southport's geologists have estimated that there is a 70% chance that the ore will be "h Depending on the net price, both ore classifications could be commercially successful. igh grade", and otherwise, it will be "low grade". The anticipated net prices depended on market conditions, and also on the metallurgical properties of the ore. Southport's economists have simplified the continuous distribution of possible prices into a two distribution ("high" or "low" net price) for the investment analysis. The probabilities of these net prices, and the associated outcomes (in millions of dollars), are summarized below. -outcome discrete ow Grade metallurgy (p=0.3) robability 6 High Grade metallurgy (p-0.7) robability Prices High Low Outcome utcome $2.5 $5 $2.5 Should Southport invest in the mine or not? What is their expected profit? a. Southport should invest, the expected profit is 46. b.Southport should not invest, the expected profit is-10. c. Southport should invest if the price is high, the expected profit is 5. r d. Southport should invest, the expected profit is 2.3. 1 points

Explanation / Answer

E(X) = 0.7 *( 0.8 * 5 + 0.2 * (-2.5)) + 0.3 (0.6 * 2.5 + 0.4* (-5))

= 2.3

E(X) > 0

hence southport should invest

option D) is correct

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