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
|
Camera S
|
|
|
Amount
|
Probability
|
Amount
|
Probability
|
|
Initial investment
|
$4,000
|
1.00
|
$4,000 1.00
|
|
|
Annual rate of return
|
|
|
|
|
|
Pessimistic
|
20%
|
.25
|
15%
|
.20
|
|
Most likely
|
25%
|
.50
|
25%
|
.55
|
|
Optimistic
|
30%
|
.25
|
35%
|
.25
|
a. Determine the range for the rate of return for each of the two cameras.
b. Determine the expected value of return for each camera.
c. Purchase of which camera is riskier? Why?