You are supporting the annual planning process for a wealth management business and have been asked to evaluate two investment opportunities competing for the same capital. One is a Merrill advisor workstation upgrade intended to improve advisor productivity, and the other is a client acquisition campaign for Merrill Guided Investing. The CFO wants a recommendation based on expected financial return over one year, with a clear view of downside risk because only one project can be funded this quarter.
| Metric | Advisor Workstation Upgrade | Merrill Guided Investing Campaign |
|---|---|---|
| Upfront investment | $2,400,000 | $2,400,000 |
| Best-case annual incremental profit | $4,000,000 | $5,200,000 |
| Base-case annual incremental profit | $3,000,000 | $3,100,000 |
| Downside annual incremental profit | $1,200,000 | $800,000 |
| Probability of best case | 25% | 30% |
| Probability of base case | 50% | 40% |
| Probability of downside | 25% | 30% |
How would you evaluate these two investment opportunities and which one would you recommend funding? Walk through the financial framework you would use and how the risk profile affects your decision.