P85 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.

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

Determine the expected value of return for each camera.

Purchase of which camera is riskier? Why?

	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

Problem P8-1:
		Vaue of Investment X 1 year ago =	$20,000
Part a:		Vaue of Investment Y 1 year ago =	$55,000
		Investment X cash flow =	$1,500
		Investment Y cash flow =	$6,800
		Current Market Value of Investment X =	$21,000
		Current Market Value of Investment Y =	$55,000
		Rate of return on Investment X =
		Rate of return on Investment Y =
Part b:	Assuming both investments are equally risky, which
	should he recommend?