GD Properties LLC is considering investments in two differen

GD Properties, LLC is considering investments in two different properties. Investment A will yield 16% in the optimistic scenario, 11% in the most likely scenario, and 7% in the pessimistic scenario. Investment B will yield 21% in the optimistic scenario, 14% in the most likely scenario, and 5% in the pessimistic scenario. There is a 20% chance of occurrence for the pessimistic scenario, a 60% chance for the most likely scenario, and a 20% chance for the optimistic scenario.

a) Compute the expected IRR for each scenario.

b) Compute the variance and standard deviation for each scenario.

c) What investment would you recommend?

Solution

a. Investment A

Exected IRR = 11.20%

variance = 0.000816

standard dev = 2.8566%

Standard dev/expected return = 0.2551

Investment B

Expected IRR = 13.60%

Variance = 0.002584

standard dev = 5.0833%

Standard dev/ expected return = 0.3738

c) A is better since SD/ expected return is lower