P8-4 Risk analysis Solar Designs is considering an investment in an expanded pro
ID: 2712539 • Letter: P
Question
P8-4 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. 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's most likely outcome is 21% per year and that all other facts remain the same. Does your answer to part C flow change? Why?Explanation / Answer
ANSWER a
RANGE OF RETURNS (PESSISMISTIC - OPTIMISTIC)
EXPANSION A => (24 - 16 ) => 8%
EXPANSION B => ( 30 - 10 ) => 20%
ANSWER b
EXPANSION A IS LESS RISKY AS COMPARE TO EXPANSION B , BECAUSE A OFFERS THE MOST LIKELY RETURN AS EXPANSION B ONLY BUT WITH LESSER RISK RETURNS.
ANSWER c
I WOULD LIKE TO CHOOSE EXPANSION A ONLY AS INITIAL INVESTMENT IN BTH THE PROJECTS ARE SAME BUT RISK IN EXPANSION A IS LESS, SO MOST PREFERABLE OPTION WILL REMAIN EXPANSION A ONLY.
ANSWER c
IF MSOT LIKELY OF EXPANSION B INCREASES TO 21%, THEN ALSO DECISSION REMAINS SAME BECAUSE INCREASE IN RETURN INCREASES ONLY BY 1% WHEREAS RISK IS 12% HIGHER THAN EXPANSON A, SO ITS BETTER TO GO FOR EXPANSION A ONLY
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