Bruce Quinn, the chief financial offer of a large Government of Canada department, is considering two projects, each designed to achieve the same mandated government objective.
The costs of both products are subject to uncertainty and are described in the following exhibit:
Project 1
Cost
Probability
$40,000,000
0.1
$50,000,000
0.2
$62,000,000
0.4
$71,000,000
0.2
$82,000,000
0.1
Project 2
Cost
Probability
$40,000,000
0.1
$48,000,000
0.2
$62,000,000
0.2
$75,000,000
0.3
$85,000,000
0.2
Required:
a. If the criterion is to choose the project with the lowest expected cost, which project should Bruce recommend?
b. If the criterion is to choose the project whose cost has the lower probability of exceeding $70,000,000, which project should Bruce recommend?