Answered: Project 1 50% $120,000 50% -$50,000…

Project 1 50% $120,000 50% -$50,000 Project 2 30% $100,000 40% $50,000 30% -$60,000 Project 3 70% $20,000 30% -$5,000 Project 4 30% $40,000 30% $30,000 20% $20,000 20% -$50,000

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 9EP

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Suppose that your organization is deciding which of four projects to bid on, as summarized in the following table. Assume that all up-front investments are not recovered, so they are shown as negative profits. Draw a diagram and calculate the EMV for each project. Write a few paragraphs explaining which projects you would bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answer.

Project
Chance of Outcome
Estimated Profits
Project 1
50%
$120,000
50%
-$50,000
Project 2
30%
$100,000
40%
$50,000
30%
-$60,000
Project 3
70%
$20,000
30%
-$5,000
Project 4
30%
$40,000
30%
$30,000
20%
$20,000
20%
-$50,000

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