You Are Evaluating Investment Alternatives for a Ski Resort If You Use the EMV Criterion and You Decide Investment

question 19

Multiple Choice

You are evaluating investment alternatives for a ski resort.There are four alternative investments and their payoffs (in $10,000s) are shown in the following table, depending on the snow conditions for the next season. $\begin{array}{r}\text { Snow Conditions }\\\begin{array}{ccc}\text { Investment } & \text { Good } & \text { Bad } \\d_{1} & 3 & 1 \\d_{2} & 8 & 0 \\d_{3} & 12 & -4 \\d_{4} & 18 & -12\end{array}\end{array}$ If you use the EMV criterion and you decide investment d₂, then the probability that the snow conditions are good is ______.

• A)more than 0.5
• B)more than 0.17
• C)more than 0.25 and less than 0.67
• D)less than 0.17 or more than 0.5
• E)more than 0.17 and less than 0.5

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Definitions:

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity levels, allowing for better budget-to-actual comparisons.

Favorable Spending Variance

A situation in which actual spending is less than the budgeted or projected amount, indicating cost efficiency.

Actual Cost

The real cost incurred in the production of goods or services, including all direct and indirect expenses.

Static Planning Budget

A budget based on a single level of activity, not adjusted for changes in activity levels during the period.