A New Business Opportunity Has a 70% Chance of Being

question 21

Multiple Choice

A new business opportunity has a 70% chance of being worth $500,000 next year and a 30% chance of being worth $100,000. The appropriate expected rate of return is 10%.
-Refer to the information above. This new opportunity will be financed with a $150,000 commercial loan. What must the promised future payoff to the lender be? Round your answer
To the nearest dollar.

• A)$380,000
• B)$171,429
• C)$345,455
• D)$192,857

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Definitions:

Contract Curve

In economics, the curve that represents the set of Pareto efficient allocations in an Edgeworth Box diagram.

Utility Function

A symbolic depiction illustrating the ranking of preferences a consumer holds across various goods or outcomes.

Edgeworth Box

A diagram used in economics to show the distribution of resources and the potential gains from trade between two individuals in a pure exchange economy.

Contract Curve

The contract curve represents a set of efficient allocations in the Edgeworth Box, where no participant could be made better off without making another participant worse off.