Setup: Packard Corp. has several new projects that look attractive, but some are riskier than the firm's past projects. Packard has received a major inflow of cash from a venture capital firm, in exchange for 25% of the firm's closely held stock. The VC firm has asked Packard managers to "run the numbers" to examine both the market outlook and the expected returns on each of the projects they are considering. The cash infusion will not cover all the proposed projects; Packard and its new investors need to know which projects should be approved.

1. Based on Packard's earnings history over the past 15 years, which have covered various states of the economy, the venture capital execs want Packard to estimate their overall returns. Given the following estimates of economy over the next several years, determine Packard's expected rate of return. (6 pts)

Note, this type of development firm has much higher than normal returns under normal and boom conditions. The probability of each state of the economy reflects the current situation, not necessarily historic market conditions for the firm.

State of the Economy	Current Probability of State of the Economy	Rate of Return if State Occurs
Boom	10%	25.00%
Normal	60%	15.00%
Recession	30%	-18.00%

Expected return for average company project (based on assumed economic probabilities) =