Risk and Probability Dianne Hospitality is considering the purchase of one of two cooking units, A and B, for its pub in the Lake District region of UK. Each of the units requires an initial investment of £12,000 and will be operational for the next 10 years. Management has constructed the accompanying table showing estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results.

a. Determine the range of the rate of return for each of the two cooking units.

b. Determine the average return for each cooking unit.

c. Which cooking unit seems like the riskier purchase? Why?

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Initial investment Annual rate of return Pessimistic Most likely Optimistic Cooking Unit A Amount Probability 12,000 1.00 15% 22% 28% 0.20 0.60 0.20 Cooking Unit B Amount 12,000 15% 22% 28% Probability 1.00 0.10 0.70 0.20