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 following table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results:

Camera R:

Initial Investment Amount: $4,000

Initial Investment Probability: 1.00

Annual rate of return

Pessimistic Amount: 23%

Pessimistic Probability: 0.29

Most likely amount: 28%

Most likely probability: 0.37

Optimistic amount: 32%

Optimistic Probability: 0.34

Camera S:

Initial Investment Amount: $4,000

Initial Investment Probability: 1.00

Annual rate of return

Pessimistic Amount: 15%

Pessimistic Probability: 0.17

Most likely amount: 27%

Most likely probability: 0.59

Optimistic amount: 33%

Optimistic Probability: 0.24

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

b. Determine the value of the expected return for each camera.

c. Which camera purchase is riskier? Why?