Refer to the Following:
a Firm Is Considering the Decision $\text { The economy }$

question 33

Multiple Choice

Refer to the following:
A firm is considering the decision of investing in new plants. It can choose no new plants, one new plant, or two new plants. The following table gives the profits for each choice under three states of the economy. The manager assigns the following probabilities to each state of the economy: the economy expands, 20%, the economy contracts, 40%, or the economy is unchanged 40%.
$\text { The economy }$
$\begin{array}{lccc} & \text { expands }(0.20) & \text { contracts }(0.40) & \text { unchanged }(0.40) \\\hline \text { no new plants } & \$ 10 \text { million } & -\$ 2 \text { million } & \$ 3 \text { million } \\1 \text { new plant } & \$ 20 \text { million } & -\$ 3 \text { million } & \$ 7 \text { million } \\2 \text { new plants } & \$ 30 \text { million } & -\$ 6 \text { million } & \$ 5 \text { million }\end{array}$
-Using the expected value rule which is correct-Building

• A) no new plants is better than one.
• B) one new plant is better than two.
• C) one new plant is equivalent to building two.
• D) one new plant is better than none.
• E) c and d

Distinguish between valid and sound arguments.

Understand the concept of warranted arguments and when an argument is considered worthy of acceptance.

Comprehend the progression from coincidence to correlation to causal explanations.

Recognize the impact of statistical analysis in evaluating arguments and making generalizations.

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Definitions:

Decision Tree

A graphical representation used to display decisions and their possible consequences, including chance event outcomes, resource costs, and utility.

Expected NPV

The anticipated net present value of a project or investment, calculated using estimated inflows and outflows to assess its profitability and risk.

Cost Of Capital

The rate of return a company must offer investors to entice investment in the company, reflecting the risk of investing in the firm.

Capital Asset Pricing Model

A framework detailing how expected returns on assets, especially stocks, correlate with systematic risk.