Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-The scores in a scoring model can be thought of as subjective assessments of
A) usefulness.
B) worthiness.
C) utility.
D) payoff.

Question

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. 
-The scores in a scoring model can be thought of as subjective assessments of
A) usefulness. 
B) worthiness. 
C) utility. 
D) payoff.

Quizplus · Accepted Answer

Investment C has the highest expected payoff of $800,000, which is calculated as follows: 
($500,000 x 0.6 x 0.8 = $240,000) + ($1,200,000 x 0.6 x 0.2 = $144,000) + ($0 x 0.4 = $0) + ($1,500,000 x 0.4 x 0.6 = $360,000) + ($300,000 x 0.4 x 0.4 = $48,000) = $800,000. Therefore, choosing investment C would be the best choice.

Exhibit 14.5 The Following Questions Are Based on the Information Below