Lindsey and Tobias have the opportunity to invest in a project that requires an
ID: 2621239 • Letter: L
Question
Lindsey and Tobias have the opportunity to invest in a project that requires an investment of $3,000. There is a 35% chance of a $2,900 return; a 40% chance of a $3,400 return; and a 25% chance of a $4,500 return one year from now. Lindsey requires a 15% return on the project after the first year, but Tobias requires a return of only 12%. Using the expected rate of return:
a. Lindsey and Tobias should both invest in the project
b. Only Tobias should invest in the project
c. Only Lindsey should invest in the project
d. Lindsey and Tobias should both reject the project
a. Lindsey and Tobias should both invest in the project
b. Only Tobias should invest in the project
c. Only Lindsey should invest in the project
d. Lindsey and Tobias should both reject the project
Explanation / Answer
Answer is Option - a) Lindsey and Tobias should both invest in the project
Expected Return on project = probability weighted return values = (35% * 2900) + (40% * 3400) + (25% * 4500) = 1015 + 1360 + 1125 = 3500
Investment = $3000
FV = PV * (1 + r)n
FV = 3500, PV = 3000, n = 1
(1 + r) = 3500/3000 = 1.1667
r = 0.1667
r = 16.67% This is greater than required returns for both Lindsey and Tobias and hence both can invest in project.
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