A bank is considering offering a loan of $100,000 to a client. If the loan is not offered, then the bank invests the $100,000 receives a sure payoff from the investment of $200 (i.e., receives $100,200 at the end of the year). Prior to a decision of whether or not to offer the loan, the bank can run a credit analysis on the client that returns one of two possible predictions: (1) the client will default on the loan in which case the bank would lose $100,000, (2) the client will pay back the loan with interest in which case the bank receives a payoff of $6,000 (i.e., receives $106,000 at the end of the year). The probability that the credit analysis will return the first prediction (client defaults) is 1%. What is the EVPI?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A bank is considering offering a loan of
$100,000 to a client. If the loan is not offered,
then the bank invests the $100,000 receives a
sure payoff from the investment of $200 (i.e.,
receives $100,200 at the end of the year).
Prior to a decision of whether or not to offer
the loan, the bank can run a credit analysis on
the client that returns one of two possible
predictions: (1) the client will default on the
loan in which case the bank would lose
$100,000, (2) the client will pay back the loan
with interest in which case the bank receives a
payoff of $6,000 (i.e., receives $106,000 at the
end of the year). The probability that the
credit analysis will return the first prediction
(client defaults) is 1%. What is the EVPI?
Transcribed Image Text:A bank is considering offering a loan of $100,000 to a client. If the loan is not offered, then the bank invests the $100,000 receives a sure payoff from the investment of $200 (i.e., receives $100,200 at the end of the year). Prior to a decision of whether or not to offer the loan, the bank can run a credit analysis on the client that returns one of two possible predictions: (1) the client will default on the loan in which case the bank would lose $100,000, (2) the client will pay back the loan with interest in which case the bank receives a payoff of $6,000 (i.e., receives $106,000 at the end of the year). The probability that the credit analysis will return the first prediction (client defaults) is 1%. What is the EVPI?
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