Risk and return
Not what you're looking for?
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 doe this imply about your feelings 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?
Purchase this Solution
Solution Summary
Determines the risk and returns for two projects.
Solution Preview
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 ...
Purchase this Solution
Free BrainMass Quizzes
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.