P8–5 Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results.

a. Determine the range for the rate of return for each of the two cameras.

b. Determine the expected value of return for each camera.

c. Purchase of which camera is riskier? Why?

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Camera R Camera S Amount Probability Amount Probability Initial investment $4,000 1.00 $4,000 1.00 Annual rate of return Pessimistic 20% 0.25 15% 0.20 Most likely 25% 0.50 25% 0.55 Optimistic 30% 0.25 35% 0.25