Respuesta :
Answer: please refer to the explanation section
Explanation:
investment = $4520
expected investment value = $5617
there expected return = (5617 - 4520)/4520 = 0.242699115
there expected return = 24.27%
return from risky investments= 8%
Risk free treasury bills rate = 1%
the investment Value expected is 5617 which represents a 24.27% required rate return
investing in Landscaping business will yield a return of 8% while investing in treasury bill will yield 1% both investments returns are less than the 24.27% expected rate of return.
I would not not invest in the landscaping business
Answer:
I will not invest
Explanation:
From the question, there are two investment opportunities as follows:
1. To invest in my friends landscaping business and obtain an expected return of 8% offered by other investments of equal risk.
2. To invest in one-year Treasury bills and obtain a return of 1%.
Therefore, my decision will be based on which of the two above offer a higher rate of return than my expected return. If none of two return is higher than my expected return, I will not invest in either of the two.
Computation of my expected rate of return (MERR):
MERR = [(Worth of investment - Investment cost) ÷ Investment cost] × 100
MERR = [($5,617 - $4,520) ÷ $4,520] × 100
= [$1,097 ÷ $4,520] × 100
= 0.242699115044248 × 100
= 24.27% approximately.
Decision:
Since both the 8% expected return from my friend's landscape business and 1% expected return from one-year Treasury bills are lower than my 24.27% expected return, I will not invest in any of my friend's landscape business and one-year Treasury bills.
