You are considering investing in two independent projects "A" and "B". Project A requires an initial investment of $12,000. In one year, there is a 30% chance of a $10,500 return; a 50% chance of a $12,500 return; and a 20% chance of a $14,500 return. Project B requires an initial investment of $1,000. In one year, there is a 25% chance of a $950 return; a 25% chance of a $1,000 return; and a 50% chance of a $1,200 return. If you require a 7% return on your investment after one year, you should:
A) Accept A and reject B
B) Accept B and reject A
C) Accept both projects
D) Reject both projects

Question

Quizplus · Accepted Answer

The expected return for Project A is less than the required 7% return, while Project B's expected return exceeds the required 7% return.

You Are Considering Investing in Two Independent Projects "A" and "B