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Sunshine Corp.'s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers Of

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Sunshine Corp.'s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers Of Sunshine must choose between two mutually exclusive projects. Assume that the project Sunshine chooses will be the firm's only activity and that the firm will close one year from today. Sunshine is obligated to make a S4,800 payment to bondholders at the end Of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects. Assume that the discount rate is O. High- Volatility Volatility Economy Probability Project payoff Project payoff 0.50 0.50 S4,800 4,840 S3,800 5,000

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