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