Answer ALL questions. Question 1 (20) 1.1 Consider the following investments and their expected returns and standard deviations of expected returns. Investment Expected Return Standard Deviation 12% 2 13% 12% 3 11% 11% 4 13% 11% 1 12% Considering that you are a risk averse investor, which investment would you prefer from each of the following pairs? (a) 1 and 22 (b) 2 and 47 (c) 3 and 42 (d) 1 and 4? 1.2 Suppose you are offered two investments with the following expected cash flows. Economic Probability of Possible Possible Scenario scenario Outcome Outcome Investment 1 Investment 2 Boom 20% R1000 R1200 Normal 50% R750 R750 Bust 30% R250 R117 Calculate the expected value (returns) of each investment. Calculate the standard deviation for each investment's possible outcomes. Which investment is riskier? Explain. 1.2.1 1.2.2 (8) 1.2.3 Question 2 (20) Glow Engineering is considering two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cost for the truck is R171 000 and that for the pulley system is R224 300. The firm's cost of capital is 14%. The after-tax cash flows of the two pieces of equipment are given as follows. Year 1 2 3 4 5 Truck 51 000 51 000 51 000 51 000 51 000 Pulley 75 000 75 000 75 000 75 000 75 000 Required: 2.1 2.2 Calculate Payback Period and Net Present Value for each project. Determine which project should be chosen using Payback Period and Net Present Value (16)