A software company must decide to select one of the following projects: A). Develop and market a new version of their special software B). Update a package that is currently being marketed. The firm has collected the following information Alternative Initial cost Net return /year Probability of duration of sate (years)(2) 1 2 3 4 5 A $500000 $250000 0.1 0.2 0.3 0.2 0.2 B $20000 $120000 0.4 0.3 0.2 0.1 0.00 1). Using the expected present worth, which alternative project should the firm choose if the interest rate is 10% 2). Repeat question 1 if the net return from the alternative projects are: - Project A: The probability distribution of net return per year is as follows: Net Return 220000 240000 Probability 0.05 0.25 260000 0.40 280000 0.25 30000 0.05 - project B: Normally distributed with mean $122000 and standard deviation of $10000. (1). Note. If interest rate = r and inflation rate = f, then the combined effects is like a higher interest rate IR. We know that, without taking care of inflation we have: F- P(1 +r)", And P = F/(1+r)" When inflation is present at the rate of f percent per year, in the above equations We replace (1+r) with Ir =(1+r)*(1+f). Here ir=r + f(1+r) is called the effective rate of return or interest rate which includes inflation. (2) See the tutorial, Generating Random values from a Discrete Probability Distribution