2 problems

1 Greengage, Inc., a successful nursery, is considering several expansion projects. All of the alternatives promise to produce an acceptable return.

Data

on four possible projects follow.

Project expected return

range

standard deviation

A 12.0% 4.0% 2.9%

B 12.5 5.0 3.2

C 13.0 6.0 3.5

D 12.8 4.5 3.0

a. Which project is least risky, judging on the basis of range?

b. Which project has the lowest standard deviation?

Explain why

standard deviation

is not an appropriate measure of risk for purpose of this comparison.

c. Calculate the

coefficient of variation

for each project

. Which project should Greengage’s owners choose?

Explain why ؟

2 – P5–4 Risk analysis Solar 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?