Question

Peter Vu is the operations manager for Pearsman, a real estate investment firm. Peter must decide if Pearsman is to invest in a strip mall in a southwest metropolitan area. If the shopping center is highly successful, after tax profits will be $100,000 per year. Moderate success would yield an annual profit of $50,000, while the project will lose $10,000 per year if it is unsuccessful. Past experience suggests that there is a 40% chance that the project will be highly successful, a 40% chance of moderate success, and a 20% probability that the project will be unsuccessful. (a) Calculate the expected value and standard deviation of profit. (b) The project requires an $800,000 investment. If Pearsman has an 8% opportunity cost on invested funds of similar riskiness, should the project be undertaken?

          Peter Vu is the operations manager for Pearsman, a real estate investment firm. Peter must decide if Pearsman is to invest in a strip mall in a southwest metropolitan area. If the shopping center is highly successful, after tax profits will be $100,000 per year. Moderate success would yield an annual profit of $50,000, while the project will lose $10,000 per year if it is unsuccessful. Past experience suggests that there is a 40% chance that the project will be highly successful, a 40% chance of moderate success, and a 20% probability that the project will be unsuccessful. (a) Calculate the expected value and standard deviation of profit. (b) The project requires an $800,000 investment. If Pearsman has an 8% opportunity cost on invested funds of similar riskiness, should the project be undertaken?

Added by Anthony F.

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