You have $20,000 to invest. Assume the bond and stock markets are which of the f

Question

You have $20,000 to invest. Assume the bond and stock markets are which of the following investment has positive NPV? A government bond yielding 5% annual return. A stock index fund providing an expected return of 12% per annum. A local winery involving $20,000 initial outlay and is expected to provide perpetual annual incomes of $3,000, it is about as risky as investing in the stock index fund. Lend to Cousin Cook's new cafe business to earn 8% annual interest. Cook has just obtained a 9% business loan from a local bank. A term deposit that earns a 7% annual interest rate.

Explanation / Answer

A) A govt bond yielding 5% annual return

B) A stock index fund providing an expected return of 12% per annum

C) Annual income = $3,000. Return = $3,000 / $20,000 = 15%

D) Cost of Cook on loan from me = 8%, Cost of Cook to outsiders = 9%. Net return to me = 8%

E) A term-deposit that earns a 7% annual interest rate.

Therefore, option C gives maximum returns. thus it has positive NPV

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