Question
A construction company is considering bidding on a new project. The company estimates that the project has a 60% chance of being successful and a
A construction company is considering bidding on a new project. The company estimates that the project has a 60% chance of being successful and a 40% chance of being unsuccessful. If the project is successful, the company will make a profit of $500,000, but if it is unsuccessful, the company will lose $250,000. The company can purchase an option that will pay $150,000 if the project is unsuccessful, but the option costs $50,000. What is the expected value and standard deviation of the company's net profit with and without the option? Should the company purchase the option?
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