Alternative investments project, investor, investing, following

water2012

An investor is considering investing in a venture capital project that will have a large payoff at exit, which is estimated to occur in four years. The investor realizes that the risk of failure is high, given the following estimated probabilities:

Year 1 2 3 4
Failure Probability 0.30 0.28 0.28 0.25

The probability that the project will survive to the end of the fourth year is:


A) 25.00%.

B) 27.22%.

C) 27.75%


Answer is B

Is the probability that the project will FAIL at the end of the 4th year?

JGovender

No, it's the probability that it will NOT FAIL.

(1-.3)(1-.28)(1-.28)(1-.25) = .2722

kasinkei

WILL fail is 1 - .2722

Consider it in concext with the conceptual Venture Capital section. Venture capital is highly risky and I think the text even says the success rates are very low, so by definition the failure rates should be very high.

Thus, WILL FAIL is 1 - seccess rate (which should be low).

__________

"good personality ... or he was known as Lt. Mandingo during his army days."



Edited 1 time(s). Last edit at Tuesday, December 1, 2009 at 11:55AM by nuppal.