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Do Homework - Cristian Clementi - Google Chrome Secure | https://www.mathxl.com yerHomework.aspx?homeworkId=448 577573 &questionld; = 1 &flushed; = false&cld-4704237;&centerwin; =yes FIN-350-MWF1230A-Fundamentals of Business Financs Cristian Clementi 12/3/17 6:21 PM Homework: Module 7, Chapter 8 Score: 0 of 5 pts P8-4 (similar to) Save 1 of 8 (0 complete HW Score: 0%, 0 of 40 pts Question Help Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. Ater investigating the possible outcomes, the company made the estimates shown in the following table a. Determine the range of the rates of retum for each of the two projects. b. Which project is less risky? c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? d. Assume that expansion B's most likely outcome is 186 per year and that all other facts remain the same. Does this change your answer to part c? a. The range for the rate of return for expansion A is% (Round to the nearest whole number) Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) nsion A Expansion B Amount Amount $13,000 $13,000 Initial investment Annual rate of return Pessimistic Most likely 11% 17%% 27% 10% 17% 28% Print Done Enter your answer in the answer box and then click Check Answer Clear All Check Answer O Type here to search 6-22 PM 12/3/2017

Explanation / Answer

a. The range of rate of return for Expansion A = Highest - lowest =27 - 11 = 16%

The range of rate of return for Expansion B = Highest - lowest = 28 -10 = 18%

b. Expansion A is less risky becuse of a lower range in rate of return

c. Expected rate of return for Expnasion A = 1/3 * 11% + 1/3*17% + 1/3 * 27% = 18.33%

Expected rate of return for Expansion B = 1/3 *10% + 1/3*17% + 1.3*28% = 18.33%

Since both have the same expected return and A has lower risk, I would choose a (becuase I am risk averse)

d. If B's most likely outcome uis 18%, then my decesion will change and I would now choose Expansion B rather than A since it has a higher expected return as shown below:

Expnasion A = 1/3 * 11% + 1/3*17% + 1/3 * 27% = 18.33%

Expansion B = 1/3 *10% + 1/3*18% + 1.3*28% = 18.67%

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