Use the portfolio technique to analyze the following problem. An investor has $1
ID: 2470709 • Letter: U
Question
Use the portfolio technique to analyze the following problem. An investor has $100,000 to invest in a business venture, or she can earn 12 percent/year with a $100,000 certificate of deposit for 4 years. Three possible business ventures have been identified. Any money not invested in the business venture can be put into a bank account that earn 8 percent/year. Based on a future worth analysis, what should be done with the $100,000? Bank account can be added to at any time. Cort. Ficate of Deposit can only deposit at t = 0. Show a full analysisExplanation / Answer
Analysis of Investment Proposals:
End of Year
Future value of $ 1 (At 12%)
BV 01
BV 02
BV 03
Cash Flow
Future Value
Cash Flow
Future Value
Cash Flow
Future Value
A
B
C = B*A
D
E = D*A
F
G =F*A
0
1.57352
$ (35,000.00)
$ (55,073.18)
($80,000.00)
($125,881.55)
($60,000.00)
$ (94,411.16)
(1+1.12)^4
1
1.40493
$ -
$ -
$10,000.00
$ 14,049.28
$ -
$ -
(1+1.12)^3
2
1.2544
$ -
$ -
$10,000.00
$ 12,544.00
$40,000.00
$ 50,176.00
(1+1.12)^2
3
1.12
$ -
$ -
$10,000.00
$ 11,200.00
$ -
$ -
(1+1.12)^1
4
1
$ 50,000.00
$ 50,000.00
$90,000.00
$ 90,000.00
$40,000.00
$ 40,000.00
Net Future Value of the Investment
$ (5,073.18)
$ 1,911.73
$ (4,235.16)
We can think of investment in BV02 as it will result in positive future value, lets see portfolio options below:
Portfolio Options:
Option 1:
Amount invested
Net Future Value
Investment in BV02
$ 80,000.00
$ 1,911.73
Investment in Bank Deposit
$ 20,000.00
$ 7,209.78
20000*(1.08^4) - 20000
Total
$ 100,000.00
$ 9,121.51
Option 2:
Amount invested
Net Future Value
Investment in certificate of Deposit
$ 100,000.00
57351.936
100000*(1.12^4) - 100000
Total
$ 100,000.00
$ 57,351.94
Hence it is better to invest total $100,000 in certificate of deposit.
Analysis of Investment Proposals:
End of Year
Future value of $ 1 (At 12%)
BV 01
BV 02
BV 03
Cash Flow
Future Value
Cash Flow
Future Value
Cash Flow
Future Value
A
B
C = B*A
D
E = D*A
F
G =F*A
0
1.57352
$ (35,000.00)
$ (55,073.18)
($80,000.00)
($125,881.55)
($60,000.00)
$ (94,411.16)
(1+1.12)^4
1
1.40493
$ -
$ -
$10,000.00
$ 14,049.28
$ -
$ -
(1+1.12)^3
2
1.2544
$ -
$ -
$10,000.00
$ 12,544.00
$40,000.00
$ 50,176.00
(1+1.12)^2
3
1.12
$ -
$ -
$10,000.00
$ 11,200.00
$ -
$ -
(1+1.12)^1
4
1
$ 50,000.00
$ 50,000.00
$90,000.00
$ 90,000.00
$40,000.00
$ 40,000.00
Net Future Value of the Investment
$ (5,073.18)
$ 1,911.73
$ (4,235.16)
We can think of investment in BV02 as it will result in positive future value, lets see portfolio options below:
Portfolio Options:
Option 1:
Amount invested
Net Future Value
Investment in BV02
$ 80,000.00
$ 1,911.73
Investment in Bank Deposit
$ 20,000.00
$ 7,209.78
20000*(1.08^4) - 20000
Total
$ 100,000.00
$ 9,121.51
Option 2:
Amount invested
Net Future Value
Investment in certificate of Deposit
$ 100,000.00
57351.936
100000*(1.12^4) - 100000
Total
$ 100,000.00
$ 57,351.94
Hence it is better to invest total $100,000 in certificate of deposit.
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