A Decision Tree Shows a 30% Probability of $2 Million

question 23

Multiple Choice

A decision tree shows a 30% probability of $2 million in returns and a 70% chance of $1 million in returns.What is the maximum you would invest today in this project if the cash inflow occurs one year in the future and the discount rate is 10%?

• A) $818,182
• B) $1,181,818
• C) $1,300,000
• D) $1,363,636

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Definitions:

Price Taker

A market participant that accepts market prices as given and has no influence to alter the price of the good or service.

Buyer

A person or organization that purchases goods or services.

Law Of Demand

The economic principle stating that, all else being equal, as the price of a good or service decreases, consumer demand for it will increase, and vice versa.

Quantity Demanded

The quantity demanded is the amount of a good or service that consumers are willing and able to purchase at a given price, holding all else constant.