Question
Suppose you are an entrepreneur who has recently invested $50,000 in a startup company. You have two options to consider: to continue with your investment
Suppose you are an entrepreneur who has recently invested $50,000 in a startup company. You have two options to consider: to continue with your investment or to sell your shares to an interested buyer. You estimate that the future value of your investment in the company will depend on two factors: the success of the company and the general market conditions. Based on your analysis, you assign the following probabilities and estimated returns:
- If the company is successful, there is a 60% chance that the investment will be worth $100,000 and a 40% chance that it will be worth $80,000.
- If the company is not successful, there is a 70% chance that the investment will be worth $30,000 and a 30% chance that it will be worth $10,000.
- The probability that the market will be favorable is 0.6, and if it is favorable, the investment will be worth 110% of its estimated value. If the market is not favorable, the investment will be worth 90% of its estimated value.
You have received an offer from a buyer who is willing to purchase your shares for $60,000. Should you sell your shares or continue with your investment?
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