Consider the Following Equally Likely Project Outcomes: Profit

question 43

Multiple Choice

Consider the following equally likely project outcomes: Profit
X Y
Pessimistic prediction $ 0 $500
Expected outcome $ 500 $500
Optimistic prediction $1000 $500

• A) Investors will prefer project X because it potentially offers a higher profit.
• B) Investors will reject both projects because the profit is too low.
• C) Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.
• D) Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

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Definitions:

Self-supporting Growth Rate

The maximum growth rate a firm can achieve without requiring additional external financing.

External Funds

Capital that comes from outside of a company, which can include debt financing from banks or equity financing from investors.

Assets And Liabilities

The fundamental components of a company's or individual's financial position, where assets represent resources owned, and liabilities represent obligations owed to others.

Spontaneously Generated Funds

Internal funds generated by a company's operations without the need for external financing.