Houston office because a replacement for Cotner would be needed.

Cotner considered high and low oil prices equally likely. However, she believed the probability of a strong economy was twice that of a weak economy. She did not believe a weak economy was likely to last more than 2 years. Low oil prices, on the other hand, could continue for at least 5 years. Oil prices and economy were both strong at the moment.

It would cost approximately $75,000 to open an office in either San Francisco or Alaska. The costs would be primarily development costs and would be expensed for tax purposes. Fixed assets included in this cost would be under $10,000, and a provision of the tax law allowed expensing up to $10,000 of fixed asset acquisitions. Cotner had approximately $200,000 invested in U.S. government securities earning 9 percent, so she would have no difficulty in getting the $75,000.

Compute expected return of standard deviation of annual return for each alternative separately.

Chapter 13 Risk from the Company Perspective TABLE 13-3 Profitability of Houston Dist 13-3 Houston Disbursement Profitability fitability of Houston Disbursement in various economic conditions. Variable wages are sercent of revenue, and variable operating costs are 20 percent of revenue, OIL PRICES: Total revenue Variable wages Variable operating costs Fixed wages Fixed operating costs Earnings before tax WEAK ECONOMY LOW HIGH $200,000 $300,000 80,000 120,000 40,000 60,000 50,000 50,000 45,000 45,000 ($ 15,000) $ 25,000 STRONG ECONOMY LOW HIGH $250,000 $400,000 100,000 160,000 50,000 80,000 50,000 50,000 45,000 45.000 $ 5,000 $ 65,000 TABLE 13-4 Profitability Estimates for New Office Locations This table contains profitability estimates for two possible locations for a new office of Houston Disbursement. Profitability for each is estimated using both strong and weak national economies and high and low oil prices. ALASKA OIL PRICES: Total revenue Variable wages Variable operating costs Fixed wages Fixed operating costs Earnings before tax WEAK ECONOMY LOW HIGH $ 50,000 $300,000 20,000 120,000 10,000 60,000 30,000 30,000 30,000 30.000 ($40,000) $ 60,000 STRONG ECONOMY LOW HIGH $75,000 $400,000 30,000 160,000 15,000 80,000 30,000 30,000 30.000 30,000 ($30,000 $100,000 CALIFORNIA LOW OIL PRICES: Total revenue Variable wages Variable operating costs Fixed wages Fixed operating costs Earnings before tax WEAK ECONOMY LOW HIGH $200,000 $200,000 80,000 80,000 40,000 40,000 40,000 40,000 35,000 35,000 $ 5,000 $ 5,000 STRONG ECONOMY HIGH $250,000 $250,000 100,000 100,000 50,000 50,000 40,000 40,000 35.000 35,000 $ 25,000 $ 25,000 Chapter 13 Risk from the Company Perspective TABLE 13-3 Profitability of Houston Dist 13-3 Houston Disbursement Profitability fitability of Houston Disbursement in various economic conditions. Variable wages are sercent of revenue, and variable operating costs are 20 percent of revenue, OIL PRICES: Total revenue Variable wages Variable operating costs Fixed wages Fixed operating costs Earnings before tax WEAK ECONOMY LOW HIGH $200,000 $300,000 80,000 120,000 40,000 60,000 50,000 50,000 45,000 45,000 ($ 15,000) $ 25,000 STRONG ECONOMY LOW HIGH $250,000 $400,000 100,000 160,000 50,000 80,000 50,000 50,000 45,000 45.000 $ 5,000 $ 65,000 TABLE 13-4 Profitability Estimates for New Office Locations This table contains profitability estimates for two possible locations for a new office of Houston Disbursement. Profitability for each is estimated using both strong and weak national economies and high and low oil prices. ALASKA OIL PRICES: Total revenue Variable wages Variable operating costs Fixed wages Fixed operating costs Earnings before tax WEAK ECONOMY LOW HIGH $ 50,000 $300,000 20,000 120,000 10,000 60,000 30,000 30,000 30,000 30.000 ($40,000) $ 60,000 STRONG ECONOMY LOW HIGH $75,000 $400,000 30,000 160,000 15,000 80,000 30,000 30,000 30.000 30,000 ($30,000 $100,000 CALIFORNIA LOW OIL PRICES: Total revenue Variable wages Variable operating costs Fixed wages Fixed operating costs Earnings before tax WEAK ECONOMY LOW HIGH $200,000 $200,000 80,000 80,000 40,000 40,000 40,000 40,000 35,000 35,000 $ 5,000 $ 5,000 STRONG ECONOMY HIGH $250,000 $250,000 100,000 100,000 50,000 50,000 40,000 40,000 35.000 35,000 $ 25,000 $ 25,000