Fin 419 week 2 assignment
Week 2 Text Assignments
5.3) Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:
Investment

Expected Return 
Expected risk index 
X 
14% 
7% 
Y 
12 
8 
Z 
10 
9 
a. If Sharon were riskindifferent, which investments would she select?
Explain why.
b. If she were riskaverse, which investments would she select? Why?
c. If she were riskseeking, which investments would she select? Why?
d. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?
5.4) 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?
c. If you were making the investment decision, which one would you choose? Why? What does 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?
P55) Risk and probability MicroPub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10year period, and each requires an initial investment of $4,000. Management has constructed the table (at the top of the facing page) 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 expected value of return for each camera.
c. Purchase of which camera is riskier? Why? In Excel Please
10.4) Basic sensitivity analysis Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table.

Project A

Project B 
Initial Investment 
$8,000 
$8,000 
Outcome 
Annual cash inflows 

Pessimistic 
$200 
$900 
Most Likely 
1000 
1000 
Optimistic 
1800 
1100 
a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm’ s cost of capital is 10% and that both projects have 20year lives. Construct a table similar to this for the NPVs for each project. Include the range of NPVs for each project.
c. Do parts a and b provide consistent views of the two projects? Explain.
d. Which project do you recommend? Why?
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