Please show work. 1. Project A’s data is below: If there is: Expected return Pro
ID: 2737648 • Letter: P
Question
Please show work.
1. Project A’s data is below:
If there is: Expected return Probability of occurrence
Strong demand 20% .20
Normal demand 12% .60
Weak demand 4% .20
a. What is the expected return for the project?
b. If the required rate of return is 13%, should they proceed with the project?
c. You are analyzing Project B against Project A. Project B has a range of 19, which is considered more risky A or B?
d. Does this mean Project B is automatically eliminated from consideration?
Explanation / Answer
a.
Expected return = r1*p1+r2*p2+r*p3 = 20%*0.20+12%*0.60+4%*0.20 = 0.12 or 12%.
b.
As the required rate of return is 13%, and the expected return is 12%. it is not advisable to proceed with the project as the expected return is less than the required rate of return.
C.
Project B is more risky than Project A
d.
Since, Project B is more riskier than Project A, it would eliminate the project B automatically.