Consider the following equally likely project outcomes: Profit
X Y
Pessimistic prediction $ 0 $500
Expected outcome $ 500 $500
Optimistic prediction $1000 $500
A) Investors will prefer project X because it potentially offers a higher profit.
B) Investors will reject both projects because the profit is too low.
C) Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.
D) Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

Question

Quizplus · Accepted Answer

Investors will prefer project Y because even though it offers the same expected return as project X, its outcome is certain. Project X has a higher potential profit but also a higher level of risk, which investors may not be willing to take. Project Y offers a lower potential profit but a certain outcome, which may be more appealing to risk-averse investors. Option A is incorrect because the potential for higher profit alone does not necessarily make a project more appealing to investors. Option B is incorrect because investors do not necessarily reject projects solely based on low profit, as other factors such as risk and certainty of outcome also come into play. Option D is incorrect because investors may still prefer one project over another even if they have the same expected outcome, as risk and certainty of outcome also factor into decision making.

Consider the Following Equally Likely Project Outcomes: Profit