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QUESTION

A company is considering an investment in two different expansions. The following estimates have been calculated for each project. X

A company is considering an investment in two different expansions. The following estimates have been calculated for each project.

                                                                X                              Y

Initial Investment                                15,000                     15,000

Annual Rate of Return

Pessimistic                                            16%                          10%

Most Likely                                            20%                           20%

Optimistic                                              24%                           30%

  • What is the range of the rates of return for each of the projects?
  • Which project is less risky? Why?
  • Which investment would you choose? Why?
  • What does your investment choice say about your feelings towards risk?
  • Assume that expansion Y most likely outcome is 21% per year and that all other facts remain the same.  Does this change your investment choice answer?  Why?
  • What are the ethical considerations that the company's managers should observe when deciding between the two projects?
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