Question

A venture capitalist, willing to invest $1,000,000, has three investments to choose from. The first investment, a software company, has a 5% chance of returning $8,000,000 profit, a 30% chance of returning $1,000,000 profit, and a 65% chance of losing the million dollars. The second company, a hardware company, has a 15% chance of returning $3,000,000 profit, a 50% chance of returning $1,000,000 profit, and a 35% chance of losing the million dollars. The third company, a biotech firm, has a 20% chance of returning $7,000,000 profit, a 25% of no profit or loss, and a 55% chance of losing the million dollars. Order the expected values from smallest to largest.

Answer 1

Answer:

Project order from the smallest to the largest is as follows:

1. Software with $50,000

2. Hardware with $650,000

3. Biotech firm with $850,000

Explanation:

Weighted returns for each project

Software returns= $(5%*8,000,000+30%*1,000,000 +65%*-1,000,000) =$50,000

Hardware returns=$(15%*3000000+50%*1000000+35%*-1000000)

=$650,000

Biotech firm returns=$(20%*7,000,000+25%*0+55%*-1,000,000)

=$850,000