Below you have a payoff table for a project that is under consideration. Possibl

Question

Below you have a payoff table for a project that is under consideration.

Possible future demand

Alternatives                low          med     high

Project A                      50            60        85

Project B                      60            60         60

Project C                      40             50        90

Probabilities               0.2             0.5      0.3

1. Which alternative would you select given the probabilities in the table above and the Expected Value Approach? (Project A,B, or C?)

Explanation / Answer

Expected value for project A = 50(0.2) + 60(0.5) + 85(0.3) = 65.5

Expected value for project B = 60(0.2) + 60(0.5) + 60(0.3) = 60

Expected value for project C = 40(0.2) + 50(0.5) + 90(0.3) = 60

Since the expected value in case of project A is highest, project A must be chosen.

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