solution

You must make a decision regarding which one of three investment opportunities to take. Each investment will be affected by the prime interest rate established by the Federal Reserve Board. If the prime rate is 5 percent or higher (p = 0.40), the first alternative has an expected payout of $90,000. If the prime rate is less than 5 percent (p = 0.60), the payout for the first alternative is expected to be $120,000. The corresponding payouts for the second alternate are a $10,000 loss and a $200,000 profit. For alternative #3, the payouts are estimated at $50,000 regardless of the prime rate.

Which investment should you select to maximize profits?