5-4 Risk analysis Solar Designs is considering an investment in an expanded prod

Question

5-4 Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. After investigating the possible outcomes, the company made the estimates shown in the following table: Expansion A Expansion B Initial investment $ 12,000 12,000 Annual Rate of return Pessimistic 16 % 10 % Most Likely 20 % 20 % Optimistic 24 % 30% a. Determine the range of the rates of return for each of the two projects. b. Which project is less risky? Why? c. If you were making the investment decision, which one would you choose? Why? What does this imply about your feelings toward risk? d. Assume that expansion B's most likely outcome is 21% per year and that all other facts remain the same. Does this change your answer to part c? Why?

Explanation / Answer

)    

Expansion

Range

A

24% - 16% = 8%

B

30% - 10% = 20%

(==========

b) Project A is less risky, since the range of outcomes for A is smaller than the range for
Project B.

=========

(c) Since the most likely return for both projects is 20% and the initial investments are equal, the answer depends on your risk preference.

=======

(d) The answer is no longer clear, since it now involves a risk-return trade-off. Project B has a slightly higher return but more risk, while A has both lower return and lower risk.

Expansion

Range

A

24% - 16% = 8%

B

30% - 10% = 20%

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.