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Global Gas International offers to contract the Halidurton Heavy Construction Corporation to build an oil pipeline from Canada to New Orleans that will provide Halidurton ​$600 million in income. The probability that the oil pipeline will​ leak, causing environmental damage is theta. If​ so, the legal liability will be ​$1 comma 200 million. If Halidurton is risk neutral and liable for the damages from a​ leak, what is the theta such that it is indifferent between accepting and rejecting the​ contract?

Respuesta :

Answer:

probability that make risk neutral accepting project < [tex]\frac{1}{3}[/tex] or 33.33 %

Step-by-step explanation:

given data

income = $600 million

legal liability = ​$1,200 million

to find out

what is the theta such that it is indifferent between accepting and rejecting the​ contract

solution

we know here that risk neutral between accept and reject contract   θ value will be as that when net present value NPV of contract = 0

so

we can say NPV > 0

so ( 1- θ )  $600 Million + θ ( $1200 Million)  > 0

$600 Million > $1800 θ

θ < [tex]\frac{1}{3}[/tex] = 33.33 %

so probability that make risk neutral accepting project < [tex]\frac{1}{3}[/tex] or 33.33 %

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