Expected value of research projects Patrick Corporation is preparing its research and development budget for the coming year. Two research projects are being evaluated. Project A is expected to cost $400,000. If the project is not successful, the company will recover nothing from its investment. There is a 45 percent chance that the project will fail and a 40 percent chance that it will be moderately successful, in which case the expected gain is $2,000,000. There is also a 15 percent probability that the project will be very successful, in which case it would yield $3,500,000. Project B will cost $500,000 to develop. There is a 30 percent probability that the project will fail, in which case the company can expect to recover $300,000 of its investment. The probability that the project will yield $1,500,000 is 60 percent, and the probability that it will yield $2,800,000 is 10 percent. Management has decided that it can fund only one of the research projects.

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REQUIRED Evaluate each of the projects and determine the expected value. Advise management which project it should adopt.