2. An individual is considering three possible ways to invest the Rs 200,000 he has just inherited.

Option 1: Some of his friends are considering financing a hotel. This venture is highly risky and could result in either a major loss or a substantial gain within a year. He estimates that with probability 0.6, he will lose all his money. However, with a probability of 0.4, he will make a Rs 200,000 profit.

Option 2: He can invest in some apartments. Within one year, that project will produce a profit of at least Rs. 10,000, but it might yield Rs. 15,000,Rs. 20,000,Rs. 25,000,or possibly even Rs. 30,000. He estimates that the probabilities of these five returns at 0.20, 0.30, 0.25, 0.20 and 0.05 respectively.

Option 3: He can invest in some government securities that have a current yield of 8.25 %.

a) Which investment will maximize his expected one year profit?

b) How much would he be willing to pay for perfect information (EVPI) about the success of the hotel venture?

c) How much would he be willing to pay for perfect information (EVPI) about the success of the apartment venture?