Risk analysis Solar Designs is considering an investment in an expanded product

Question

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 decision imply about your feelings toward risk?
d. Assume that expansion B

Explanation / Answer

a. range of the rates of return

Expansion A : 16-24%

Expansion B : 10-30%

b. Expansion A will be less risk as the changes in return are not varying like Expansion B.

c. Expansion A would be choosen because the lowest returns are some where on better position as well as highest rates are very good.

d. No, it will not be changes as it is some where equivalent to the earlier rate.

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