Problem: Lunar Designs is considering an investment in an expanded 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:
|
|
Expansion A
|
Expansion B
|
|
Initial investment
|
$12,000
|
$12,000
|
|
Annual rate of return
|
|
|
|
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 feeling toward risk?
D. Assume that expansion B’s most likely outcome is 21% per year and that all other facts remain the same. Does this change your answer to part c? Why?