Solar Designs is considering an investment in an expanded product line. Two poss

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.

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 imply about your feelings toward risk?

d. Assume that expansion B

Explanation / Answer

a)range for A =24-16 =8% , range for B = 30-10 =20%

b)second project is more risky as it has wider range. i.e as it has more standard deviation

c)I will choose first investment as it is having lesser risk.I am risk averse person

d)no it will not change my decission in part c . as it is not affecting range

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