Question

Imagine you have K 6.5 million at your disposal to invest in your various options of investments. However you have no indication on how to effectively go about it and accordingly make a quality decision, but you have some indistinct ideas. One option available to you is to build a block of flats or invest this lump sum in undisclosed type of investments. You are also privy to the fact that building flats will yield the same returns if you invested in these other unrevealed investment options available over same life span [you will need to mention them in (d)]. Assuming in the economy you are domiciled in, the prevailing interest rates are pegged at 35 percent and to complete a block of flats it will take you 3 years, of which inflation is at 25 percent. Further you should note that other factors of investment are only varied in long run to increase your available lump sum of investment, which may be constrained by the rising inflation as time rolls on. a) Calculate the net present value of your investment sum over the 3 year time horizon?

A) NPV will be positive, indicating a profitable investment in building flats.

B) NPV will be negative, suggesting a loss in investing in undisclosed options.

C) NPV will be zero, showing an equal return in both building flats and other investments.

D) NPV cannot be determined based on the information provided.


b) What principle would be relevant to the understanding of variation of factors of investment in the SR and LR?
A) Law of Diminishing Marginal Returns

B) Time Value of Money

C) Opportunity Cost

D) Law of Supply and Demand

c) Further, by applying relevant managerial principles (which you should mention here) to surmount this conflict, show why it would be rational to invest in other investment options other than building flats to resolve this investment choice problem you are confronted with?
A) Principle of Risk Management

B) Principle of Diversification

C) Principle of Cost-Benefit Analysis

D) Principle of Short-Term Gain


d) From your calculations and knowledge of managerial principles, mention the type of instruments of investment you would have used here to invest your money, other than building flats, if you had adequately evaluated your investment options?
A) Government Bonds

B) Mutual Funds

C) Real Estate Investment Trusts (REITs)

D) Cryptocurrency


e) Based on your computations and comparisons which investment option is more technically viable and appealing, further state the managerial principle you would apply to make an effective and quality decision for this, based on time horizon, give reasons for your answer?

A) Building Flats; Principle of Long-Term Stability

B) Other Investments; Principle of Opportunity Cost

C) Building Flats; Principle of Short-Term Gains

D) Other Investments; Principle of Risk Aversion

Answer 1

a) The NPV can be calculated using the cash flows, discount rate, and inflation rate. b) The Time Value of Money principle is relevant for understanding investment variation in the SR and LR. c) Applying managerial principles like Diversification and Cost-Benefit Analysis can help resolve investment choice problems.

Step-by-step explanation:

a) To calculate the net present value (NPV) of your investment sum over the 3-year time horizon, you need to consider the cash flows, discount rate, and inflation rate. The NPV is the present value of all future cash flows minus the initial investment. Based on the prevailing interest rate of 35 percent and the project duration of 3 years, you can calculate the NPV using the formula:

NPV = -Initial Investment + (Cash Flow Year 1 / (1 + Discount Rate) + Cash Flow Year 2 / (1 + Discount Rate)2 + Cash Flow Year 3 / (1 + Discount Rate)3)

b) The relevant principle for understanding the variation of factors of investment in the short run (SR) and long run (LR) is the Time Value of Money. This principle recognizes that the value of money changes over time due to factors like inflation and interest rates. It helps evaluate the present and future worth of investments.

c) Applying relevant managerial principles like the Principle of Diversification and the Principle of Cost-Benefit Analysis can help in resolving the investment choice problem. Diversification helps spread the risk by investing in multiple options, and Cost-Benefit Analysis helps compare the costs and benefits of each investment option.

d) Based on your calculations and knowledge of managerial principles, the type of instruments of investment you could consider other than building flats, given adequate evaluation, could include Government Bonds, Mutual Funds, Real Estate Investment Trusts (REITs), or Cryptocurrency. These options provide different levels of risk and returns, depending on your investment goals.

e) After comparing computations, the investment option that is more technically viable and appealing will depend on various factors, such as the time horizon, risk tolerance, and desired returns. Applying the Principle of Risk Aversion can help make an effective and quality decision. This principle focuses on minimizing the risk and maximizing the probability of positive returns.