Risk and probabilityMicro-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:

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?

Camera R Camera S

Amount Prob Amount Prob

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