Mike Riskless is considering two projects. He has estimated the IRR for each under three possible scenarios and assigned probabilities of occurrence to each scenario.
|
State of Economy
|
Probability
|
Estimated BTIRR
Investment I
|
Estimated BTIRR
Investment II
|
|
Optimistic
|
0.20
|
0.15
|
0.20
|
|
Most likely
|
0.60
|
0.10
|
0.15
|
|
Pessimistic
|
0.20
|
0.05
|
0.05
|
|
|
1.00
|
|
|
Riskless is aware that the pattern of returns for Investment II looks very attractive relative to Investment I; however, he believes that Investment II could be more risky than Investment I. He would like to know how he can compare the two investments considering both the risk and return on each. What do you suggest?