William J. Bryan is the general manager of an electrical equipment plant. He must decide whether to install a number of assembly robots in his plant. This investment would be risky because both management and the workforce have no real experience with the introduction or operation of such robots. His indifference curve between expected rate of return and risk is as shown in the figure.

a. If the riskiness (σ) of this investment equals 3, what risk premium does he require?
b. What is the riskless rate of return?
c. What is the risk- adjusted discount rate?
d. In calculating the present value of future profit from this investment, what interest rate should be used?

Transcribed Image Text:

Expected Rate of Return (percent) 18 12 3 Risk (σ)