Project A generates $5,000.00 in revenue two years from today and costs $4,000.00. Project B generates $4,000.00 (50% probability) or $6,000.00 (50% probability) one year from today and costs $4,500.00. Assuming a discount rate of 12% for both projects, which project does a risk averse manager prefer?
a. Project A
b. Project B
c. Neither project
d. Cannot be determined
A cash flow is expected to be $500.00 (50% probability) or $1,000.00 (50% probability) next year. Assuming the cash flow next year is $500.00, the cash flow the following year is $400.00 (60% probability) or $600.00 (40% probability). Assuming the cash flow next year is $1,000.00, the cash flow the following year is $1,200.00 (80% probability) or $2,000.00 (20%) probability. What is the probability of a $1,200.00 cash flow two years from today?
a. 40%
b. 30%
c. 20%
d. 10%