Reference no: EM132636679
Sky Explorations Ltd is a company that provides aerial scanning services using drones. The company intends to expand its services by purchasing an additional drone. The survey team of the company researched the suppliers of drones and has narrowed down its preference to two drones from which it needs to select one. The two drones are the Stellar drone and the Bigeye drone.
With the assistance of the financial manager, the survey team prepared the following table with the expected internal rates of returns for both drones together with the probabilities of these returns. Sky Explorations requires a 15% return on its investment.
Stellar
Internal rate of return (IRR) - 12%
Probability - 30%
Internal rate of return (IRR) - 16%
Probability - 40%
Internal rate of return (IRR) - 20%
Probability - 30%
Bigeye
Internal rate of return (IRR) - 7%
Probability - 40%
Internal rate of return (IRR) - 15%
Probability - 20%
Internal rate of return (IRR) - 25%
Probability - 40%
Required:
Question 1: For each of these drones, calculate its expected internal rate of return, standard deviation and coefficient of variation.
Question 2: Which drone do you recommend the survey team consider purchasing? Provide reasons for your recommendation
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