Economics Query

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 hsown in the figure.
a. If the riskiness () of this investment equals 3, what risk premium does 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?
Expected
Rate of
Return
(percent)
18—————————————————-12
6
0

1

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2

3

Risk ()