FIN419 Week2 Text - Problem1:

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Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three  These investments are for the purchase of new machine tools from Germany, Japan, an The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects. Investment Expected Return Expected Risk German Tools 15.00% 8.00% Japanese Tools 13.00% 9.00% Local manufacturer 11.00% 7.00% a) If Jonathon were risk-indifferent, which investments would he select? Explain why. Answer: Jonathon would select the Japanese and local manufacturer  in returns do not change as risk goes from 7% to 9%.  Both have  the firm earns (10%) and the risk does not matter. b) If he were risk-averse, which investments would he select? Why? Answer: In this case he would select the Geerman tools investment beca highest expected rate of return but the second lowest expected offers an increase in return for taken on greater risk. c) If he were risk-seeking, which investment would he select? Why? Answer: Jonathon would select the German and Japanese tool investme to take higher risk whether there is an increase in return or not. d) Given the traditional risk reference behavior exibited by financial managers, which invest preferred? Why? Answer: Finanical managers are generally risk-averse so he or she wou investment.  It provides the required increase in return for an inc
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 possible investments. nd a local US manufacturer. nvestments because the  higher returns than what ause it provides the   return.  This investment ents because he is willing . tment would be  ld prefer the German tools crease in risk.
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Problem 2: Big Bank, Inc., is considering the purchase of one of two high speed servers, R and S.   provide benefits over a 10-year period, and each requires an initial investment of $4,000 has constructed the table (at the top of the facing page) of estimates of rates of return a for pessimistic, most likely, and optimistic results.                                   Server R
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FIN419 Week2 Text - Problem1:

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