Question

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. The pessimistic and optimistic outcomes occur with a probablity of​ 25%, and the most likely outcome occurs with a probability of​ 50%.

                            Expansion A                    Expansion B
Initial investment $12,000                            $ 12,000

Annual rate of return
Pessimistic                    11%                              15%
Most likely                    23%                                23%
Optimistic                      25%                                 21%

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 24% per year and that all other facts remain the same. Does this change your answer to part c?

Answer 1