For the next five questions consider the economy of Columbia

For the next five questions, consider the economy of Columbia. In this economy, there are three firms potentially interested in issuing a $25,000 bond to do a project each hopes will be profitable: The Heckle Firm has a 70% chance of a $40,000 return. The ickle Firm has an 80% chance of a $38,000 return. The Jackle Firm is credibly guaranteed to get a $30,000 return. The only other possibility for all firms is failure, a $0 return. Assume that these firms will issue bonds as long as savers want them. Calculate the expected value of the Ickle Firm\'s project. Carefully follow all numeric instructions.

Solution

Icke\'s firm project has 80% probability of earning profit of $38,000 and 20% probability of $0.

Expected VAlue of Icke\'s firm\'s Project = 80% of $38,000 + (100% - 80%) * $0= $30,400 + $0 = $30,400

Hence the Value of Icke\'s firm project is $30,400