Decision Theory

Mario is trying to decide whether to invest his Php100,000 in a bank (as a 5-year time
deposit) or use it as capital to put up a business. If he will invest his money in a bank, it
will earn a 1.2% interest compounded annually. For instance, for the first year, his money
will be 100,000 + 100,000 * 0.012 = 101,200; for the second year, 101,200 +
101,200*0.012 = 102,414.4; and so on. On the other hand, if Mario invested his money to
put up a business, it will require him additional P20,000 costs for business registration. If
the business will be successful (and has 55% chance of being successful), he will earn a
total earnings of P260,000 for the span of 5 years; otherwise, he will lose all of his capital. If
you were Mario, what would you do?

Solution:

If he invested in bank, his money including capital is

5
100,000 ( 1.012 ) =106,145.74
Investment in bank (earnings):
106,145.74−100,000=6,145.74

Investment in business (earnings):

EMV B = 260000(0.55)-120000(0.45) = 89,000

89,000>6145.74
EMV A = 89,000

Conclusion: If I were Mario, I would Invest my money to business with Expected

Earnings of P89,000