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Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are under review. After investigating the possible
Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are under review. After investigating the possible outcomes, the company made the estimates shown in the following table: E. The pessimistic and optimistic outcomes occur with a probablity of 25%, and the most likely outcome occurs with a probability of 50%. a. Determine the range of the rates of return for each of the two projects. b. Which project is less risky? A Data Table If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? d. Assume that expansion B's most likely outcome is 19% per year and that all other facts remain the same. Does this change your a a. The range for the rate of return for expansion Ais% (Round to the nearest whole number.) (Click on the icon here in order to copy the contents of the dala table below into a 1. spreadsheet.) The range for the rate of return for expansion Bis%. (Round to the nearest whole number.) Expansion A Expansion B Amount b. Which project is less risky? (Select from the drop-down menus.) Amount Initial investment $12,000 $12,000 is less risky because it has a range for the rate of retum. Annual rate of return Pessimistic 15% 12% c. If you were making the investment decision, which one would you choose? What does this imply about your feelings toward risk? Most likely 18% 18% Optimistic 30% 33% O A. Choose expansion B because it has a higher optimistic rate of retum regardless of its risk. OB. Choose expansion A because it is less risky and thus a better investment Print Done O C. Since the most likely return for both projects is the same, you can choose either project regardless of your risk preference. OD. Since the average return for both projects is the same and the initial investments are equal, the answer depends on your risk preference. Since the returns on Project B are more volatile, so a risk-averse investor would prefer Project A. d. Assume that expansion B's most likely outcome is 19% per year and that all other facts remain the same. Does this change your answer to part c? (Select the best answer below.) O A. No. OB. Yes. OC. Not enough information to
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