A new product may be a dud (20% probability), an average seller (70%

probability), or dynamite (10% probability). If it is a dud, the payoff will be $20,000; if it is an average seller, the payoff will be $40,000; and if it is dynamite, the payoff will be $80,000.

(a) What is the expected payoff of the project?

(b) The appropriate expected rate of return for such payoffs is 8%.What is the PV of the payoff?

(c) If the project is purchased for the appropriate present value, what will be the rates of return in each of the three outcomes?

(d) Confirm the expected rate of return when computed from the individual outcome-specific rates of return.