Posted by **Devon** on Monday, February 25, 2008 at 10:13pm.

A person must decide whether or not to proceed with a particular investment project. If the project succeeds, She will gain $15 million. If the project fails, she will lose $3 million. She estimates there is a 20% chance that the project will succeed and an 80% chance it will fail.

There is a consultant that could tell her with certainty if the project succeed or fail, but only for a fee. What is the most that she should be willing to pay the consultant for the information? Explain. Assume that she correctly estimated the probabilities of the project’s likely success and failure.

I AM LOST on this one - can anyone please help?

- Economics -
**economyst**, Tuesday, February 26, 2008 at 8:58am
First, lets assume the person is RISK NEUTRAL -- where the change in utility from an expected dollar loss is equal to the change in utility from an expected dollar gain.

That said, this is simply a comparison of the expected return on the person's investment. Without the consultant, there is a 20% chance she gets 15M and an 80% chance she loses 3M.

E(return) = .2*15 - .8*3 = 0.6

If she hires the consultant, she will only make the investment if its a win. However, taking into account of the fee, her expected return must greater than what she could do without the consultant. So:

E(return) = .2*(15 - F) - .8*F - 0.6

I get the Fee=2.4

## Answer this Question

## Related Questions

- Devon - A person must decide whether or not to proceed with a particular ...
- Finance - Wheel Industries is considering a three year expansion project. The ...
- finance - Wheel Industries is considering a three-year expansion project. The ...
- Finance - FIN500, Inc. has the following project. It is a 4 year project and ...
- statistics - Your program has an RDT&E-funded project scheduled to start in July...
- math - Your program has an RDT&E-funded project scheduled to start in July 2005 ...
- Finance - Your program has a proposed RDT&E-funded project scheduled to start in...
- Math - Your program has a proposed RDT&E-funded project scheduled to start in ...
- finance - You have been given the following information on a project: It has a 3...
- College math HELP!!!!! - A financier plans to invest up to $450,000 in two ...

More Related Questions