Project A’s data is below: If there is: Expected return Probability of occurrenc

Question

Project A’s data is below:

If there is:                         Expected return        Probability of occurrence

Strong demand              20%                            .20

Normal demand             12%                            .60

Weak demand                3%                              .20

a. What is the expected return for the project?

b If the required rate of return is 13%, should they proceed with the project? Why?

c You are analyzing Project B against Project A. Project B has a range of 19, which is considered more risky A or B?

d. Does this mean Project B is automatically eliminated from consideration?

Explanation / Answer

Stock A Expected Return Probability (return* probability) Strong demand 20% 0.20 0.040 Normal demand 12% 0.60 0.072 Weak demand 3% 0.20 0.006 EXPECTED RETURN FROM STOCK A = 11.80%

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