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 $5,000. Management has constructed the following table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results: LOADING... . 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? a. The range for the rate of return for camera R is nothing%. (Round to the nearest whole number.) The range for the rate of return for camera S is nothing%. (Round to the nearest whole number.) b. The value of the expected return for camera R is nothing%. (Round to two decimal places.) The value of the expected return for camera S is nothing%. (Round to two decimal places.) c. Which camera purchase is riskier? Why? (Select from the drop-down menus.) The purchase of ▼ camera R camera S is riskier because it has a ▼ smaller larger range for the rate of return. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Camera R Camera S Amount Probability Amount Probability Initial investment $5,000 1.00 $5,000 1.00 Annual rate of return Pessimistic 16% 0.27 23% 0.16 Most likely 27% 0.49 28% 0.53 Optimistic 31% 0.24 30% 0.31

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 12P

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Question

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

$5,000.

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.

Which

camera purchase is riskier? Why?

The

range for the rate of return for camera R is

nothing%.

(Round to the nearest whole number.)

The range for the rate of return for camera S is

nothing%.

(Round to the nearest whole number.)

b. The value of the expected return for camera R is

nothing%.

(Round to two decimal places.)

The value of the expected return for camera S is

nothing%.

(Round to two decimal places.)

Which

camera purchase is riskier? Why? (Select from the drop-down menus.)

The purchase of

▼

camera R

camera S

is riskier because it has a

▼

smaller

larger

range for the rate of return.

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

	Camera R	Camera S
	Amount	Probability	Amount	Probability
Initial investment	$5,000	1.00	$5,000	1.00
Annual rate of return
Pessimistic	16%	0.27	23%	0.16
Most likely	27%	0.49	28%	0.53
Optimistic	31%	0.24	30%	0.31

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