A family business is considering making an investment in its manufacturing operation.Three decisions are under consideration: (1) a large investment; (2) a medium investment;and (3) a small investment.The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand;and (3) decreasing demand.The following payoff table describes the decision situation.
The best decision for the business using the equal likelihood criterion would be to
Definitions:
Dividend
A portion of a company's earnings that is paid to shareholders, typically on a regular basis.
Risk-Free Rate
The expected profit from an investment that carries no chance of financial loss, typically shown by the interest rate on governmental bonds.
Growth Rate
The rate at which a company's earnings, revenue, or other critical metric increases over a specified period.
PVGO
Present Value of Growth Opportunities, a valuation method that calculates the value of a firm's growth opportunities and their contribution to the company's total value.
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