Micro-Pub. Inc, is considers the purchase of one of two microfilm cameras, R and
ID: 2756812 • Letter: M
Question
Micro-Pub. Inc, is considers 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 $3,000. Management has constructed the following table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results: Determine the range for die rate of reran for each of the two cameras. 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 The range for the rate of return for camera The value of the respected return for camera R is The sake of the expected return for camera Which camera purchase is riskier? Why?Explanation / Answer
A./
ANNUAL RATE OF RETURN FOR CAMERA S
PESEMESTIC 24%
MOST LIKELY 26%
OPTIMISTIC 33%
RANGE OF RETURN = 33% - 24%
=9%
ANNUAL RATE OF RETURN FOR CAMERA R
PESEMESTIC 16%
MOST LIKELY 25%
OPTIMISTIC 34%
RANGE OF RETURN = 34% - 16%
=18%
B./
EXPECTED RETURN OF CAMERA R
ANNUAL RATE OF RETURN (R) PROBABILITY (P) P * R
PESEMESTIC 16% 0.25 4%
MOST LIKELY 25% 0.45 11.25%
OPTIMISTIC 34% 0.30 10.2%
BEXPECTED RATE OF RETURN =25.45%
EXPECTED RETURN OF CAMERA S
ANNUAL RATE OF RETURN (R) PROBABILITY (P) P * R
PESEMESTIC 24% 0.16 3.84%
MOST LIKELY 26% 0.54 14.04%
OPTIMISTIC 33% 0.30 9.90%
EEXPECTED RATE OF RETURN =27.78%
C./
THE PURCHASE OF CAMERA S IS RISKIER BECAUSE IT HAS A LOWER RANGE FOR RATE OF RETURN I;E 9% .