The better investment between the two.

Question

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Answer 1

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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Students have asked these similar questions

You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise. McDonald’s indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be −$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and −$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.

A drug company is considering investing $100 million today to bring a weight loss pill to the market. At the end of one year, the firm will know the payoff; there is a 0.50 probability that the pill will sell at a high price and generate $37 million per year of profit forever and a 0.50 probability that the pill will sell at a low price and generate $I million per year of profit forever. The interest rate is 10%. Suppose the firm decides to wait one year to determine whether the pill will sell at a high or low price. The firm will not invest if it learns that the pill will sell at a low price. What is the net present value of waiting one year to make the investment?O $88 millionO$122.72 millionO $201.22 millionO $64.5 million

Find the expected value assuming the risk factor is 30 % and the interest rate is 15%, if you will receive $20,000 one year from today. Find the expected value assuming the risk factor is 30 % and the interest rate is 15%, if you will receive $20,000 two years from today.

Answer 2

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Answer 6

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Answer 7

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Answer 8

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.