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Maximise the value of the company

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Reference no: EM133111919

AAA is a medical company and must decide between two mutually exclusive projects for the final year of its life. The two projects have different levels of risk and their ultimate payoff depends on the state of the economy. The company management believe that a positive economic state (Growth) and a negative economic state (Recession) are equally likely.

Low Risk Project Pay-off: recession: 350,000 Growth 800,000

High Risk Project Pay-off: recession: 100,000 Growth 800,000

AAA is partly financed by debt and the company must make a payment of £270,000 to its bond holders at the end of the year. At that time, the company will cease trading and be liquidated. Assume that whichever project AAA undertakes it will be the only thing the company does in the coming year.

i. Which project should AAA undertake in order to maximise the value of the company? Explain your workings.

Reference no: EM133111919

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