Question

P8-5 (similar to) Question Help Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $2,000. Management has constructed the following table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results: a. Determine the range for the rate of return for each of the two cameras. b. Determine the value of the expected return for each camera. c. Which camera purchase is riskier? Why? Data Table a. The range for the rate of return for camera R is %. (Round to the nearest whole number.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Camera R Amount Probability $2,000 1.00 Camera S O Amount Probability $2,000 1.00 Initial investment Annual rate of return Pessimistic Most likely Optimistic 0.27 16% 25% 32% 0.47 0.26 20% 27% 31% 0.19 0.52 0.29 Print Print Done Enter your answer in the answer box and then click Check Answer. 4 parts Clear All 4 remaining Check Answer

Answer 1

1.
=32%-16%
=16%

2.
=31%-20%
=11%

3.
=0.27*16%+0.47*25%+0.26*32%
=24.3900%

4.
=0.19*20%+0.52*27%+0.29*31%
=26.8300%

5.
Camera R is riskier as it has higher standard deviation and higher coefficient of variation

Standard Deviation
Camera R
=sqrt(0.27*(16%-24.39%)^2+0.47*(25%-24.39%)^2+0.26*(32%-24.39%)^2)=5.8513%

Camera S
=sqrt(0.19*(20%-26.83%)^2+0.52*(27%-26.83%)^2+0.29*(31%-26.83%)^2)=3.7311%

Coefficient of variation:
Camera R=5.8513%/24.39%=0.2399
Camera S=3.7311%/26.83%=0.1391