Risk Analysis?

Question

Babb products is considering an investment in an expected product line.Two possible types of expansion are being considered.After investigating the possible outcomes,the company made the estimates shown in the following table

Initial investment
Annual rate of return Expansion A Expansion B
$12,000 $12,000
Pessimistic 16% 10%
Most likely 20% 20%
Optimistic 24% 30%
a. Determine the range of the rates of return for each of the two projects.
b.which project is less risky? why?
c.If you were making the investment decision,which one would you choose?why? What does this imply about your feelings towards risk?
d. Assume that expansion B,s most likely outcome is 21 percent per year and all other facts remain the same .Does this change your answere to part c? why?

Answer 1

This should be in the homework section, methinks :-)


a. Work out the percentage of $12,000 for each case.
Example - Pessimistic Case A @ 16% = $1920..

b. Since , in bth cases, the 'most likely' outcome is 20%, the 'less risky' is the one with the lowest 'range' of outcomes.
eg. Case A is 16% to 24% a range of 8%
.. Case B is 10% to 30% a range of 20% ..

c. you choose

d. your choice again