Expected value and standard deviation of profit
Course:- Microeconomics
Reference No.:- EM13700181

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Jamie Dixon is the operations manager for Pitt Corp, a real estate investment firm. Jamie must decide if Pitt Corp is going to invest in a strip mall in Oakland. If the strip mall is highly successful, after tax profits will be $100,000 per year. Moderate success would yield an annual profit of $50,000, while the project will lose $10,000 per year if it is unsuccessful. Past experience suggests that there is a 40% chance that the project will be highly successful, a 40% chance of moderate success, and a 20% probability that the project will be unsuccessful. The project requires an $800,000 investment. If Pitt Corp has an 8% opportunity cost on invested funds of similar riskiness, should the project be undertaken? In your answer, calculate the expected value and standard deviation of profit.  

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