Question

You are thinking about investing $ 4520 in your​ friend's landscaping business. Even though you know the investment is risky and you​ can't be​ sure, you expect your investment to be worth $ 5 comma 617 next year. You notice that the rate for​ one-year Treasury bills is 1 %. ​However, you feel that other investments of equal risk to your​ friend's landscape business offer an expected return of 8 % for the year. What should you​ do?

Answer 1

I will not invest

Step-by-step 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.

Answer 2

Answer: please refer to the explanation section

Step-by-step 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