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.
Consider the timing of the profits of the following certain investment projects:
Profit
L S
Year 1 $ 0 $ 3000
Year 2 $ 3000 $ 0
A) Project S is preferred to Project L.
B) Project L is preferred to Project S.
C) Projects S and L are equally desirable.
D) A goal of profit maximization would favor Project S only.
In finance, we assume that investors are generally
A) neutral to risk.
B) averse to risk.
C) fond of risk.
D) none of the above.
Consider cash flows for Projects X and Y such as:
Project X Project Y
Year 1 $3000 $ 0
Year 2 $ 0 $3000
A rational person would prefer receiving cash flows sooner because
A) the money can be reinvested.
B) the money is nice to have around.
C) the investor may be tired of a particular investment.
D) the investor is indifferent to either proposal.
