Project A will cost your company an initial outlay of RM120,000 upfront. In a strong market condition, your company’s investment in this project will bring in RM750,000 for the company. On the other hand, in a weak market condition, your company will lose RM240,000. Project B will cost your company an initial outlay of RM150,000 upfront. In a strong market condition, your company’s investment in this project will bring in RM750,000 for the company. On the other hand, in a weak market condition, your company will lose RM300,000. By looking at the current market trend analysis, you predicted that there is a 70% chance of a strong market condition. i) Based on your understanding, draw a decision tree diagram to illustrate the options given. ii) Calculate the Expected Monetary Value (EMV) for each project. iii) By incorporating the cost of initial outlay of each project into the EMV analysis as in (ii), compare the TOTAL RISK between these options. Which project would be beneficial to your company? Justify your answer.
Project A will cost your company an initial outlay of RM120,000 upfront. In a strong market condition, your company’s investment in this project will bring in RM750,000 for the company. On the other hand, in a weak market condition, your company will lose RM240,000.
Project B will cost your company an initial outlay of RM150,000 upfront. In a strong market condition, your company’s investment in this project will bring in RM750,000 for the company. On the other hand, in a weak market condition, your company will lose RM300,000.
By looking at the current market trend analysis, you predicted that there is a 70% chance of a strong market condition.
i) Based on your understanding, draw a decision tree diagram to illustrate the options given.
ii) Calculate the
iii) By incorporating the cost of initial outlay of each project into the EMV analysis as in (ii), compare the TOTAL RISK between these options. Which project would be beneficial to your company? Justify your answer.
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