Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:QUESTION SIX
A firm is considering employing one of the two machines A and B over a period of 4
years at the end of which the salvage value of each is zero. The cost of machine A is
K10, 000 while that of machine B is K11, 000. The probability distributions of the returns
for each machine are given in the table below.
Probability
Machine A (K)
Machine B (K)
0.25
6000
7000
0.50
5000
5000
0.25
4000
3000
The risk free discount rate is 10% while the risk premium applied is as follows;
Standard deviation (K)
Risk Premium
0-999
0%
1000-1999
10%
2000-2999
10%
3000-3999
20%
Required:
Which of the two machines should be installed?
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