Tuesday 30 October 2012


P5–4 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?
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?



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