8-1 Doing higher current values make for better investment? Y has lower rate of return, but more current value?

8-4 Im clueless

P81 Rate of return Douglas Keel, a financial anaiyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable esti- mates of future returns. A year earlier, investment X had a market value of $20,000, and investment Y had a market value of $55,000. During the year, investment X generated cash ow of $1,500, and investment Y generated cash ow of $6,800. The current market values of investments X and Y are 521,000 and $55,000, respectively. a. Calculate the expected rate of return on investments X and Y using the most recent year's data. b. Assuming the two investments are equally risky, which one should Douglas rec- ommend? Why? P84 Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are under review. After investigating the possi- ble outcomes, the company made the estimates shown in the following table. The pessimistic and optimistic outcomes occur with a probability of 25%, and the most likely outcome occurs with a probability of 50%. Expansion A Expansion B Initial investment $12,000 $12,000 Annual rate of return Pessimistic 16% 10% Most likely 20% 20% Optimistic 24% 30% Determine the range of the rates of return for each of the two projects. Which project seems less risky? Why? If you were making the investment decision, which one would you choose? Why? What does this decision 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 your answer to part c now change? Why? 9"!" 9